The Employee Retention Credit (ERC) has received a lot of media coverage recently. From the IRS warning about scams, to promises of $26,000 per employee, it is hard to know which information can be trusted. So, what exactly is this credit and how can it help your business?
Both the ERC program and the Paycheck Protection Program (PPP) were passed in 2020 as part of the CARES Act. While the PPP initially got a lot of attention, the ERC received very little. The government implemented the ERC to incentivize those employers who retained their employees during the pandemic. Unlike the PPP, which carried multiple stipulations, a small business just needs to amend its 941 forms to claim this refund. Companies can even do this retroactively! The credit applies to the period from March 13, 2020, through September 30, 2021. If you classify as a Recovery Startup Business (RSB), then the ERC remained in effect until December 31, 2021, but more on that later.
For purposes of the ERC, a small business is defined as having fewer than 500 Full-Time Equivalent (FTE) employees during the 2019 calendar year.
The R&D tax credit is a tax incentive provided by the US to incentive business to invest in research and
development activities. It is designed to promote innovation and technological advancement by reducing
the tax burden on companies that are engaging in qualified research activities.
Yes! Companies that started during the pandemic are known as a Recovery Startup Business (RSB). To receive that designation, the entity must have started after February 15, 2020 and cannot qualify under SDGR or FPSO. RSBs are eligible for the ERC in both Q3 and Q4 of 2021. In addition to the normal caps, RSBs can only receive a maximum of $50,000 each quarter. But the business could potentially get more if earlier quarters are eligible under FPSO.
While there is no catch once you receive the refund, there are some things to watch out for and a few considerations that affect the credit calculation.
PPP – if you received a PPP loan, the money used towards PPP wage forgiveness cannot be counted for Employee Retention Credit.
Eligibility – you can only claim the credit in the calendar quarters you are eligible for. Some “ERC Mills” (as dubbed by the IRS) do not adequately interpret FPSO or mistakenly apply it to additional quarters. Since FPSO eligibility is more subjective, we recommend seeking a legal opinion.
Taxes – while the ERC does not count as income, it does reduce a business’s expenses. We encourage you to consult your tax advisor to determine how the ERC could affect your business’s taxes.
While you certainly could, the ERC’s complexity requires certain experience and expertise only offered by specialists in the field. It is important to make sure you meet all of the eligibility requirements. The ERC Team here at Finvisor is well-versed with the IRS’s guidelines. We know how to maximize your credits and will provide a 20+ page report that details your eligibility and stands up in the event of an audit. Please reach out today to see if your business may qualify!
The Employee Retention Credit is among the most lucrative tax credits a small business owner can attain in 2023. However, navigating these refunds can be complicated.
You can claim a credit for 50% of the first $10,000 in wages that qualify that you paid each employee during 2020. For 2021 you can claim 70% of each employee’s refundable tax credits per employee between the two years.
Your ERC amount is calculated by determining which wages qualify under the credit. This primarily depends on the number of full-time employees that were on payroll during the 2019 calendar year.
If you had less than 100 employees on average in 2019, then you can treat the wages paid to all your employees as qualified in 2020. If you exceeded that amount, only the wages you paid to employees not providing services qualify for the ERC that year.
For 2021 the maximum number of employees increased to 500. But you still base this number off of your 2019 employee count.
To simplify, if you had less than 500 people on payroll in 2019 then all of your wages are qualified for 2021. If not, then only the wages you paid to your inactive employees qualify for the credit.
When calculating your total wages paid you can also add in your group health plan expenses. This includes both what you contributed as the employer as well as any pre-tax salary reductions that were contributed by the employees.
In order to claim employee retention you have to submit an accurate and qualifying salary on line 30 of the 941 form. Before submitting the form be sure that you meet all requirements. All up to date information can be found on the IRS page Instructions for Form 941.
Finvisor’s dedicated Employee Retention Credit specialists can help with a complementary eligibility review of your business to see if you qualify for this credit.
In order to qualify for an Employee Retention Credit, you need to have been subject to one of the two possibilities:
A qualifying government order related to COVID-19 that caused a full or partial suspension of your trade or business operations.
A significant decline in gross receipts (SDGR)
An order from the city’s mayor stating that all non-essential businesses must close for a specified time period;
A state’s emergency proclamation that residents must shelter in place for a specified period, except for essential workers;
An order from a local official imposing a curfew on residents that impacts the operating hours of your trade or business for a specified time period;
An order from a local health department mandating a workplace closure for cleaning and disinfecting.
However, the government order must be related to COVID-19 and resulted in your trade or business being fully or partially suspended.
An employer is generally considered to have experienced a SDGR for applicable calendar quarters in 2020 if its gross receipts for any calendar quarter are less than 50% of its gross receipts for the same calendar quarter in 2019.
However the criteria becomes more flexible for calendar quarters in 2021. An employer can qualify for a specific quarter, when the gross receipts were less than 80% of its gross receipts for the same calendar quarter in 2019.
For companies that started after February 15th of 2020 they qualify as a recovery startup business (RSB) and can get up to $100k even if they don’t otherwise qualify. For 2021 any quarter that decreased by more than 20% versus 2019 qualifies. For ERC in 2020, gross receipts must have declined by 50% from 2019.
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