The Best Examples of Employee Retention Credits
Most small business owners are aware that during the COVID-19 outbreak, the government implemented legislation to provide owners with new choices for relief. The Payment Protection Program (PPP) was one initiative that helped employees retain their personnel. They did this by offering a sizable loan option that could be entirely repaid, called employee retention credits.
During the pandemic, another type of government assistance was introduced: the employee retention credits (ERC). To retain employees on their payroll, the ERC aids employers in obtaining a payroll tax cut. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), where it was first introduced, was later revised and expanded by successive laws. The American Rescue Plan Act, the Taxpayer Certainty and Disaster Relief Act, and the Infrastructure Investment and Jobs Act.
Given that firms have been able to operate more normally in recent months, the PPP and ERC have technically come to an end. No longer are companies eligible to qualify for PPP loans. But you can still apply for the ERC if you meet the requirements, possibly till 2024.
What Is the ERC’s Process?
Let’s first discuss the Employee Retention Credits purpose, operations, and potential impact on your small business. The government passed the CARES Act in March 2020 to assist Americans in coping with the pandemic’s economic effects. Tax relief programs like the ERC were developed to ensure that businesses could remain open and that employees could maintain their jobs.
The ERC is a completely refundable tax credit, so even if the amount of your credit exceeds your tax liability, you can still get a refund. The fundamentals of ERC eligibility, restrictions, and terms are as follows:
- Eligibility: There are two methods for being eligible for the ERC:
A government edict forced your company to either completely or partially halt operations in 2020 or 2021.
Your quarterly gross receipts were 20% less for the quarter ending in 2021 than the comparable quarter ending in 2019, or 50% less for the quarter ending in 2020.
- Credit Amount: For 2020 and 2021, the ERC amounts are as follows:
2020: Employers will pay employees up to $10,000 in total, or 50% of eligible wages.
2021: Employees will receive 70% of qualifying wages, up to a quarterly maximum of $10,000 per employee.
- Recovering startup companies: You are regarded as a recovery startup business if your company began operations after February 15, 2020. And its annual gross receipts are less than $1 million. This implies that you can also claim credit for the final three months of 2021.
- Business size: As of 2021, new legislation defined large firms as those with more than 500 employees, up from 2020’s definition of a major employer as one with more than 100 workers. Large businesses can only claim salaries given to employees for not performing services, therefore this is significant.
Examples of Employee Retention Credits
All of this information aids in determining your eligibility and provides an idea of your potential credit limit. But how is the ERC determined? How does the procedure appear? To assist you to comprehend how it functions, the following examples are comprehensive and include ERC filing examples.
A Nonprofit Employing 20 People
Business qualification: A tiny organization with 20 full-time staff had to partially halt operations in the second, third, and fourth quarters of 2020. Those three quarters would be eligible for the ERC. Regardless of whether the company experienced a decline in total sales.
Calculating eligible wages: Because the quarters occurred in 2020, the company can claim 50% of up to $10,000 for each employee paid throughout all quarters. Or $5,000 per employee per year, for a total of $100,000 in claims.
Submission and credit claim: For each applicable quarter, the business returns Form 941-X along with these calculations to retrospectively claim the credit on a previously filed quarterly tax return.
A Catering Company With Ten Staff Members
Business qualification: The third quarter of 2021 saw a 50% decline in gross receipts for a small catering company with 10 full- or part-time employees compared to the third quarter of 2019. For the ERC, this quarter (Q3 2021) would be eligible.
Calculating qualified wages: The maximum amount that can be claimed by the employer is $70,000, or 70% of the maximum $10,000 paid to each employee during that quarter.
Submission and credit claim: These computations are included in Form 941-X which the business submits for Q3 of 2021 to claim the credit retrospectively on a previously filed quarterly tax return. Payment in cash is made by the IRS.
These instances highlight the importance of the ERC as a credit for small firms. A company with only 10 employees might still receive $70,000 by simply qualifying for one quarter in 2021. The ERC is the biggest government stimulus program the nation has ever seen for precisely this reason. Here are some FAQs about ERC:
Can I Still Claim My ERC?
To claim the ERC, you still have time. Establish the qualifying quarters and compute the eligible pay. To amend your initial tax return, Form 941, Employer’s Quarterly Federal Tax Return, you will next need to submit IRS Form 941-X for the corresponding quarter or quarters.
Must I Modify My Income Tax Return?
According to the IRS, you must reduce your wage deduction by the amount of your credit. This implies that to reflect the lesser deduction amount, you may also need to alter your annual income tax return.
How Am I Going to Get the ERC?
Because it is not regarded as an income tax credit, the ERC is distinctive. The IRS will instead give you a cash payout. If you had a tax burden, the credit would be reduced by that sum even if this might be the full credit amount.
How Should I Fill Out Form 941-X?
The adjusted employer’s quarterly federal tax return or refund claim can be found on IRS Form 941-X. Basic information about your company, like your address, name, and employee identification number, must be provided (EIN). Make sure you choose the quarter for which you are applying.
Enter all of your figures in the section for qualifying salaries, qualified healthcare expenses, and employee retention tax credit. Additionally, you must thoroughly justify how your calculations were made.
Can I Use the ERC in 2022 or 2023?
No. For the majority of firms, the qualifying ERC period concluded on September 30, 2021. Startup companies in recovery have until December 31, 2021. For the years 2022 or 2023, the ERC was not renewed.
Which Quarters Are ERC Eligible?
The ERC for 2020 and 2021 does not cover all quarters. Quarters two (starting March 13, 2020), three, and four are eligible for 2020. Quarters 1, 2, and 3 are eligible for 2021. Startup companies in recovery may potentially be eligible for the final quarter of 2021.
Where Can I Find Form 941-X Instructions?
To assist you in figuring out your ERC and completing Form 941-X, the IRS publishes comprehensive guidance. Use the most recent version of the form and instructions to ensure accuracy.
If I Received a PPP Loan, Am I Still Eligible for the ERC?
Yes. Before legislation revisions, companies who obtained a PPP loan could not additionally claim the ERC. As long as you do not consider wages that were paid for by your loan, you are now eligible to apply for the ERC even if your company received a PPP loan.
If you qualify, submit your ERC claim as soon as possible. You have three years to retrospectively apply for the ERC and amend any previously filed quarterly tax returns. But you should move quickly to receive your refund.
Get in Touch With Your Part Time Accountant
The professionals at Your Part Time Accountant are prepared to assist you in obtaining credit. Whether you need to file an updated tax return, apply for the ERC, or get tax consulting services, we always offer quick and accurate service. Any inquiries you may have regarding tax credits for your company can be addressed by us.