Are you a business owner wondering how to financially navigate the post pandemic business world? You might be eligible for the Employee Retention Credit (ERC). Introduced in 2020 and extended into 2021, this federal initiative provides tax credits for businesses impacted by COVID-19.
The amount you can get varies between years and depends on several factors, including whether your operations were suspended due to government orders or if your gross receipts declined significantly. Your number of employees and qualified wages also come into play.
Not sure how it all works? Don’t worry – we’re here to break down the eligibility requirements, explain how the credit is applied, and guide you through claiming it.
So buckle up – let’s dive deep into understanding exactly how much Employee Retention Credit you could potentially receive!
2020
Did you know, for the 2020 tax year, you could’ve gotten a credit of up to half of each employee’s qualified wages? That’s up to $5,000 per employee!
This Employee Retention Credit was designed as relief for businesses keeping employees on their payrolls during challenging economic times. Not only wage costs but also group health plan expenses were considered as qualified wages. So even if no other wages were paid to an employee, these benefits still counted towards your credit.
It’s crucial to understand these nuances in the taxation system; they can significantly impact your business’ financial health. By leveraging such credits effectively, you’re not just retaining employees but also potentially saving thousands of dollars in taxes.
2021
In 2021, it’s possible for your business to claim up to $7,000 per quarter for each employee or a total of $21,000 per worker throughout the year. This is part of the Employee Retention Credit (ERC), aimed at helping businesses recover from the financial impact of COVID-19.
The credit can cover up to 70% of each employee’s qualified wages.
To be eligible, you must meet certain criteria related to full or partial suspension due to government orders or significant decline in gross receipts.
It’s important to understand these rules thoroughly and apply them correctly when claiming this substantial tax credit. Not doing so can result in errors that could lead to lost opportunities or potential penalties from the IRS.
Eligibility Requirements
Understanding the eligibility requirements for this tax incentive is critical, as they’re based on specific factors like government-ordered closures or a significant decrease in gross receipts. If your business experienced at least one of these during the calendar quarter you wish to claim the credit, you’re potentially eligible.
However, keep in mind:
- The closure must be due to a government order, not voluntary.
- The decline in gross receipts must be significant and varies between tax years 2020 and 2021.
- Your employee count also affects your eligibility.
- It’s not just about being eligible; maintaining accurate records and understanding how to calculate the credit are vital.
Navigating these considerations requires careful attention to detail and thorough knowledge of tax laws.
Suspense of Operations
Should your business operations be suspended due to government orders related to COVID-19, it’s crucial to note that you’re only eligible for the tax credit for that specific suspension period, not the entire quarter.
Essential businesses are generally ineligible unless their supply of critical materials or goods is disrupted in a way that hinders their operation. Similarly, businesses able to continue largely as normal through telework may not qualify.
However, if you meet the second eligibility requirement – significant decline in gross receipts – you can still potentially obtain the Employee Retention Credit (ERC). Understanding these specifics is vital as they directly impact your ability to leverage this financial aid during these challenging times.
Significant Decline in Gross Receipts
Feeling the weight of a significant drop in your business’s gross receipts can be overwhelming, but remember that this downturn may open up opportunities for financial aid.
If you experienced a 50 percent decline in gross receipts during any quarter of 2020 compared to the same quarter in 2019, you qualify for employee retention credit.
Starting from 2021, the threshold has been lowered. Now, if your business sees more than a 20 percent drop in gross receipts in Q1 or Q2 compared to the corresponding quarters in 2019, you’re eligible.
As a new business without figures from 2019, don’t fret! The IRS allows you to use the gross receipts of the quarter when you started as a reference point. This could provide much-needed financial relief amidst these challenging times.
How to Determine Your Eligibility
Now that we’ve discussed the significance of a decline in gross receipts, let’s delve into how you can determine your eligibility for the employee retention credit.
If you didn’t face a forced closure during the pandemic, your eligibility hinges on whether there was a notable drop in your gross receipts within any quarter of 2021 compared to that of 2019.
For instance, if your earnings in any quarter were less than 80% of what they were in the same period two years prior, you’re eligible. Alternatively, if your business wasn’t operational at the beginning of 2019, use 2020 as your benchmark year instead.
Remember, qualifying in one quarter automatically makes you eligible for the next one too!
Number of Employees
Understanding the size of your workforce is crucial when it comes to applying for the Employee Retention Credit (ERC), as the rules and benefits differ based on whether your business has more or less than 500 full-time staff members.
Here’s how it works:
- If you have 500 or fewer employees, you can apply the ERC to all wages paid, regardless if they were working during those times.
- For businesses with over 500 employees, ERC applies only to wages for workers not active during a quarter due to operational suspension or significant gross receipt decline.
- These larger employers can only count wages up to what an employee would’ve earned working a similar period in the preceding 30 days.
- Keep in mind that these rules are aligned with updates from the 2021 program overhaul.
Knowing this distinction could significantly impact your credit amount!
Qualified Wages
So, let’s dive right into the nitty-gritty of qualified wages. These are not just any ordinary wages. They’re a specific type of compensation paid by you as an employer to your full-time employees during the relevant quarter.
Now, what makes them ‘qualified?’ Well, they include your company’s health plan expenses that are properly allocable to these wages. This means if you’re paying for part or all of your staff’s health insurance costs and it relates directly to their salary, it counts as qualified wages.
Understanding this concept is crucial because it directly impacts how much employee retention credit you can claim. So remember, when calculating your ERC amount, consider both salary payouts and related health plan expenses in determining qualified wages.
How is the Credit Applied?
Diving into the application process of this credit, it’s crucial to know how it’s applied towards your business expenses. The Employee Retention Credit (ERC) acts as an overpayment and is fully refundable once your share of the employee’s Social Security taxes are subtracted.
Here are some key points to remember:
- The ERC is applied directly to your portion of the employee’s Social Security taxes.
- It’s a fully refundable credit, meaning it functions like an overpayment.
- If your credit surpasses your total liability for any quarter, the excess will be refunded back to you.
- This allows you to effectively reduce business costs, supporting your ability to retain employees during difficult times.
Understanding these aspects can help guide you through maximizing its benefits for your business.
How to Claim the Credit
To claim this benefit, picture yourself sifting through your payroll records, diligently adding up all qualified wages and related health insurance costs for each quarter. Subtract these totals from your deposit on Form 941, the Employer’s Quarterly Federal Tax Return.
If you’ve already filed taxes for 2020 but realize you’re eligible, don’t fret. You can retroactively claim the credit by filling out Form 941-X.
Now, if you’re a small employer with 500 or fewer full-time employees in 2019, you have an added advantage. You may request an advance payment of the credit using Form 7200 – Advance of Employer Credits Due to Covid-19. Be aware though that employers with over 500 employees are not eligible for advance payments.
Conclusion
You’re potentially eligible for substantial savings with the Employee Retention Credit.
Remember, eligibility hinges on suspended operations or gross receipts decline, along with employee numbers and qualified wages.
The credit’s applied against payroll taxes, claimed via Form 941.
It’s a great opportunity – don’t miss out!
Stay informed and proactive to maximize your benefits.
