What are Employee Retention Credits (ERC)?
The Employee Retention Credit (ERC) is a refundable tax credit designed help businesses keep employees during the COVID-19 crisis. The credit is part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). This was enacted in March 2020 and has been modified and extended through subsequent legislation.
Companies are still eligible to apply for the credit today. These are funds that the government and internal revenue service feels is appropriate to refund back to qualifying businesses. If you are an eligible employer you are encouraged to apply.
How does the employee retention credit work?
The Employee Retention Credit (ERC) is a tax credit program designed to encourage businesses to retain their employees during times of economic hardship, such as the COVID-19 pandemic.
The key features and workings of the Employee Retention Credit are as follows:
- Eligible Employers: Generally, the ERC is available to businesses of all sizes, including tax-exempt organizations, that meet certain criteria and paid qualified wages. Initially, the credit was primarily aimed at employers that experienced a significant decline in quarterly gross receipts or were subject to a government-mandated shutdown. However, eligibility criteria may vary depending on the specific legislation in effect at a given time. Check the website of the internal revenue service for the most up to date criteria.
- Qualified Wages: The credit is calculated based on the wages paid to employees. Initially, it covered wages paid between March 13, 2020, and December 31, 2020. Subsequent legislation extended the credit through various periods, each with its own set of rules. The credit may apply to a portion of qualified wages (up to a certain limit per employee per quarter) depending on the specific time frame.
- Credit Amount: The ERC is calculated as a percentage of qualifying wages paid to eligible employees. The percentage can vary based on the specific time period and legislative updates. The maximum credit amount can also differ between time frames.
- Employee Eligibility: The credit is available for wages paid to employees who meet certain criteria. Initially, it applied to wages paid to employees who were not providing services due to a full or partial suspension of business operations or a significant decline in gross receipts. The definition of eligible employees may have evolved over time.
- Claiming the Credit: Employers can claim the Employee Retention Credit by reporting it on their quarterly employment tax returns, such as Form 941 for most businesses. Alternatively, employers can reduce their federal employment tax deposits to account for the credit.
- Interaction with Other Programs: The ERC can interact with other COVID-19 relief programs, such as the Paycheck Protection Program (PPP). However, there are limitations and rules in place to prevent “double-dipping” by claiming both the ERC and certain other credits or loans for the same wages.
- Retroactive Amendments: Legislation introduced changes to the ERC after its initial implementation, allowing eligible employers to retroactively claim the credit for previous periods. This has led to opportunities for businesses to amend previous tax returns and receive refunds.
It’s important to note that the specifics of the Employee Retention Credit can change based on legislative updates and the economic context. To accurately understand the current rules and eligibility criteria, businesses should consult with tax professionals or refer to official guidance from the IRS or relevant government agencies.
Initially, the ERC was worth 50% of up to $10,000 in wages paid per employee in 2020. However, the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021 significantly expanded the ERC. For 2021, the credit is worth 70% of up to $10,000 in wages paid per employee per quarter. This means that for 2021, a business can claim a maximum credit of $28,000 per employee.
How to Apply for ERC?
The process of claiming the Employee Retention Tax Credit is relatively straightforward for eligible businesses. Businesses can claim the credit on their quarterly employment tax return, Form 941. If your business qualifies for the Employee retention Credit(ERC), you can reduce your federal employment tax deposits by the amount of the tax credit. If your employment tax deposits(from qualified wages paid) are not sufficient to cover the credit, you may receive an advance payment from the IRS by submitting Form 7200.
To qualify for the ERC program, a business must meet two eligibility requirements.
- The business must have experienced a significant decline in gross receipts. For 2020, this means a decline of more than 50% in a quarter compared to the same quarter in 2019. For 2021, the threshold where the credit applies is a decline of more than 20%.
- The business must have been either fully or partially suspended due to a government order related to COVID-19. It’s important to note that businesses who suffered a full or partial suspension can qualify for the ERC even if they received a Paycheck Protection Program (PPP) loan, as long as the same wages are not used for both benefits. Even if they received ppp loan forgiveness.
Second, the business must have been either fully or partially suspended due to a government order related to COVID-19. It’s important to note that businesses can qualify for the ERC even if they received a Paycheck Protection Program (PPP loans) loan, as long as the same wages are not used for both benefits.
Top 3 Reasons to Apply for ERC Today
Significant Financial Relief:
The primary reason to apply for the ERC is the substantial financial relief it offers. With a maximum credit of $5,000 per employee in 2020 and $28,000 per employee in 2021, the ERC can provide a significant cash infusion for businesses. This can be particularly beneficial for businesses that have been hard hit by the pandemic and are struggling to keep employees on their payroll.
Easy to Claim:
Unlike some other relief programs, the ERC filing process is relatively easy to claim. Businesses can claim the credit on their quarterly employment tax return, and if the credit exceeds their employment tax liability, they can receive a refund. This makes the ERC a straightforward and accessible form of relief for businesses of all sizes. There are a number of accountants providing services to small businesses looking to apply for their erc refund.
Another compelling reason to apply for the ERC is the ability to make retroactive claims. If a business did not claim the ERC in 2020 because it received a PPP loan for payroll costs, it can now go back and claim the ERC for 2020, as long as the same wages are not used for both benefits. This can provide an additional source of much-needed financial relief for businesses who saw a decline in annual gross receipts.
Who can help me with applying for the employee retention tax credit?
Applying for the Employee Retention Credit (ERC) involves navigating complex tax regulations and requirements, so it’s a good idea to seek assistance from professionals who specialize in tax and accounting services. Here are some individuals and entities that can help you apply for the ERC credit:
- Certified Public Accountants (CPAs): CPAs are licensed professionals who specialize in accounting and taxation. They can provide expert advice, help you calculate your eligible credit amount, and assist in preparing the necessary forms and documentation.
- Tax Attorneys: Tax attorneys have in-depth knowledge of tax law and regulations. They can provide legal guidance, help you understand your eligibility, and ensure you’re complying with all relevant tax laws while claiming the ERC.
- Enrolled Agents (EAs): Enrolled agents are tax professionals who are authorized by the IRS to represent taxpayers. They can assist with tax matters, including applying for tax credits like the ERC.
- Payroll Service Providers: Many payroll service providers offer assistance with tax credit programs, including the ERC. They can help you calculate and claim the credit based on your payroll data.
- Business Consultants: Business consultants with expertise in finance and taxation can guide you through the process. Their assistance with applying for the ERC and help you optimize your overall tax strategy.
- Professional Employer Organizations (PEOs): PEOs provide comprehensive HR and payroll services, including assistance with tax credit programs. They can handle various aspects of the ERC application process on your behalf.
- Chambers of Commerce and Business Associations: Local chambers of commerce and business associations often provide resources and guidance to businesses. This includes information on government programs like the ERC.
- IRS and Tax Authorities: You can reach out to the IRS or relevant tax authorities for guidance and clarification on the ERC program. They may provide information through official publications, websites, or customer service channels.
- Online Resources: The IRS provides official guidance, forms, and instructions related to the ERC on their website. Online resources and forums dedicated to tax and business matters can also offer insights and advice.
When seeking assistance, it’s important to choose reputable professionals or organizations with experience in tax matters. Be prepared to provide relevant financial and payroll information. This will help them accurately assess your eligibility and calculate the credit amount.
In Conclusion of the ERC Credit
In conclusion, the Employee Retention Credit is a valuable tool for businesses navigating the challenges of the COVID-19 pandemic. ERC provides significant financial relief, and being easy to claim. The ERC can help businesses keep their employees on the payroll and weather the storm. If your business has been impacted by the pandemic, consider applying for the ERC today. It could make a significant difference in your ability to maintain your workforce and recover from the crisis.
Contact a Star Funding representative to discuss more about the ERC and other working capital solutions for your business.
Remember, while this guide provides a general overview of the ERC, the rules surrounding the credit are complex and subject to change. Therefore, it’s always a good idea to consult with a tax professional or financial advisor to ensure you’re taking full advantage of the benefits available to your business.