In the wake of the devastating pandemic, many businesses struggled to even keep the business afloat. Fortunately, the government has not been complacent on this front. With the introduction of the Employee Retention Credit (ERC), businesses can recoup some money in order to facilitate their businesses. ERC’s are refundable tax credits with the explicit goal of encouraging businesses to keep employees on payroll. But who exactly is eligible?
There are multiple qualifying conditions in order to gain eligibility for the Employee Retention Credit. Firstly, you must operate within the US.
After that, one of the following must apply to you.
- One option is to showcase the financial ramifications of the pandemic. By using 2019 receipts to gauge what a ‘normal’ level looks like for a business, you must show a significant decline in gross receipts in 2020 and general decline in gross receipts in 2021. These declines are evaluated on a quarterly basis against the 2019 baseline.
- Another option is to convey the effect of the pandemic on your business operations. Things like the change in business hours, supply chain closure, and a reduction in the number of services offered are all good examples. However, this list is certainly non-exhaustive, and there are many ways to show the constriction of a business as the result of the pandemic.
- The final option is to qualify for the Recovery Startup Business program in the third or fourth quarter of 2021. This program is for businesses who opened on or after February 16, 2020. Furthermore, they must have gross receipts of less than $1 million for 2020 and 2021, as well as having at least 1 W2 employee that isn’t related to the owner. But how much are these credits worth?
The calculation of these credits gets slightly intricate. The total amount is based on both 2020 and 2021. For 2020, you can earn up to $5,000 per employee, for the period of March 12 to December 31. For 2021, it is categorized into 3 quarters. Per quarter, you can earn up to $7,000 per quarter, resulting in $21,000 in total. From these maximums, the credit you actually receive is dependent on the number of full-time employees in 2019.
There are two target numbers for these full-time employees, 100 and 500.
If you are less than a target number, you will earn a credit based on the wages paid to all employees, both working and not, in a given calendar quarter. If you are over a target number, you earn a credit based on wages paid to employees who didn’t work during the calendar quarter.
While the technical jargon does get quite convoluted, many businesses have pivoted to make ERC’s easier to claim. These businesses have teams of CPAs and attorneys who have experience in tax-related processes. ERC companies, for example, offer a 5-minute quiz to allow simplified pre-screening for business owners. Companies such as these make ERC’s more effective, and more efficient for the intended purpose, benefiting both businesses and the government.
Ultimately, there are few downsides to filing for ERC’s, and it’s a great way to make sure your business is here to stay.