Businesses of all kinds continue to struggle after a year and a half of the global COVID-19 pandemic. The national unemployment rate is still at 5.4% in summer 2021. Small businesses have seen record temporary and permanent closures, with some estimates claiming that there were an additional 200,000 closures in the pandemic’s first year compared to a normal year.
The government responded with several relief programs, including the Payment Protection Program (PPP), which distributed loans to over 10.7 million borrowers and more than $780 billion in forgivable loans. This program supported businesses in keeping people employed instead of having to furlough or lay off workers.
Another form of relief is the ERTC, typically referred to as the Employee Retention Credit, introduced as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in early 2020. This guide will cover what this tax credit entails, how to apply for the employee retention credit, and common challenges businesses face when trying to claim it.
An Overview of the Employee Retention Credit
The U.S. government passed the CARES Act was in March 2020 to provide immediate relief to Americans and businesses in response to the COVID-19 pandemic. The virus prompted a nationwide lockdown that severely impacted businesses, with effects that continue today.
The CARES Act included the Employee Retention Credit, which is a fully refundable payroll tax credit. It applies to certain qualified wages that businesses paid to full-time staff from March 13, 2020, to December 31, 2020. The American Rescue Plan Act of 2021 then extended the ERC through the end of 2021.
Lawmakers created this credit to encourage employers to maintain their payroll and not have to let anyone go. An eligible employer operating in 2020 or 2021 must have fully or partially suspended operations by governmental order, or experienced a significant decline in gross receipts during a quarter when compared to the same quarter in 2019.
Steps to Apply for the Employee Retention Credit
- Determine eligibility;
- Calculate qualified wages;
- File Form 941 and claim the refundable credit with quarterly IRS filings;
- Report qualified wages and other relevant information on Form 941;
- Carry any unused credits forward to succeeding quarters or years; and
- Claim a refundable tax credit when filing Form 941 on the next year’s income tax return.
Here are a few other important points about the Employee Retention Tax credit:
The 2020 credit is equal to 50% of qualified wages, and the wage limit for each employee is $10,000 for all calendar quarters. The government extended the program for 2021, and increased the credit to 70%, with a limit of $10,000 per quarter, raising the annual limit for an employee to $28,000.
Wages that qualify for the ERC are those paid to employees during the eligibility period, including health insurance costs. An eligible period is:
- The amount of time a business was suspended per governmental orders; or
- For 2020, a quarter when gross receipts were 50% less than that received in 2019, and for 2021, a quarter when gross receipts were 20% less than that in 2019
Cash Payment From the IRS
The employee retention credit is not an income tax credit and is treated a bit differently. It is not determined by your business income. The credit is typically issued as a cash payment that comes from the IRS, and it can be used to help with payroll tax payments.
Eligible businesses apply by filing 941-X, Amended Quarterly Payroll Tax Return, with the IRS. This form must be submitted within three years following the initial return filing, so businesses could have until 2024 to participate in the program.
8 Benefits of the Employee Retention Credit
Tax credits are created to help individuals and businesses avoid big tax burdens each year. COVID-19 credits were implemented to help companies stay afloat during the uncertain economic period the pandemic caused. Here are the key benefits of the Employee Retention Credit for 2021 in particular:
- Applicants Can Claim the ERC Immediately: Businesses can claim the credit right away by reducing payroll taxes sent to the IRS.
- Financial Relief: The Employee Retention Credit provides eligible employers with a refundable tax credit of up to $5,000 per employee for wages paid between March 13, 2020, and December 31, 2021.
- Helps Keep Employees on Payroll: By providing financial relief to employers, the credit can help businesses retain their employees during challenging times. This is especially important for small businesses that may not have the resources to weather economic downturns.
- Eligibility for PPP Loan Recipients: Employers who received a Paycheck Protection Program (PPP) loan are now eligible for the Employee Retention Credit as well. This means that businesses can take advantage of both programs to help keep their operations running smoothly.
- Expanded Eligibility Criteria: The pandemic negatively impacted many businesses, so meeting the requirements of a partial or complete shutdown as implemented by the government, or a loss in gross receipts, won’t be hard for many to meet. The eligibility criteria for the credit has been expanded, making it available to more employers than before. For example, businesses that experienced a decline in gross receipts of at least 20% in any quarter of 2020 compared to the same quarter in 2019 are now eligible.
- Easy to Claim: Claiming the credit is relatively easy and can be done by filing Form 941 with the IRS. Additionally, many payroll providers have integrated solutions that make claiming the credit even simpler.
- Refunds May Apply: You can request a refund if your credits exceed payroll taxes.
- New PPP Loan Recipient Allowances: Employers that received a PPP loan can now claim the credit for qualified wages that were not treated as payroll costs when getting PPP loan forgiveness.
Overall, the Employee Retention Credit is an important tool that can provide much-needed financial relief to struggling businesses while also helping them retain their valuable employees.
Just make sure you fully understand all eligibility requirements and the process for applying for the credit. It is always a good idea to discuss your situation with a professional.
Challenges of Applying for the Employee Retention Credit
There are a few difficulties to be aware of when applying for the ERC. The process can have a few hiccups that can quickly become confusing for businesses.
Any time tax law changes, there will be new provisions to remember as you try to take tax credits or deductions.
Top common challenges that businesses may face when applying for the Employee Retention Credit:
- Understanding Business eEligibility Requirements: Determining whether your business is eligible for the credit can be complex and confusing, particularly if you experienced a partial suspension of operations or a decline in gross receipts.
- Documentation: Providing accurate and complete documentation to support your application can be time-consuming and challenging, particularly if you don’t have an existing system for tracking payroll expenses and financial statements.
- Qualifying Wages: Figuring out which wages qualify and getting the percentages right for the applicable year.
- Calculating the Credit: The formula for calculating the credit is complex and requires careful attention to detail. Errors or omissions in calculations can result in a reduced credit or disqualification altogether.
- Timeliness: Applying for the Employee Retention Credit involves meeting specific deadlines, which can be challenging if you’re dealing with other pressing business matters.
- Changes in Regulations: Regulations related to the Employee Retention Credit have evolved over time, so it’s essential to stay up-to-date on any changes that may impact your eligibility or calculation of the credit.
- Multiple Businesses: Ensuring you complete the process correctly when you own multiple businesses
- Lack ofExpertise: Filling out your tax forms accurately. If you’re not familiar with tax laws and regulations, navigating the application process can be daunting. You may need to seek assistance from a tax professional or accountant to ensure that everything is completed correctly.
- Competition for Resources: Due to high demand, there may be delays in processing applications or limited resources available to assist with questions or issues that arise.
- Complexity of Rules: The rules surrounding eligibility and calculation of the credit are complex, which may lead to confusion or errors when completing your application.
Overall, applying for the Employee Retention Credit can be a challenging process that requires careful attention to detail and timely action. Seeking guidance from an expert in tax law or accounting can help ensure that you maximize your potential credit while avoiding potential pitfalls along the way.
Any of these challenges can keep employers from moving forward with the ERC. This is why it is always wise to ask for help when you’re unsure what to do next.
Get Expert Help Navigating How to Claim ERC Today
ERC Today is here to help with whatever questions or concerns you have about the Employee Retention Credit. We provide quick, easy, and flexible tax consulting services and speedy filing options, along with dedicated client support. Our team can help you figure out if you can apply for the credit in addition to your PPP loan.
ERC Today recognizes how desperately your business needs this credit to keep everything operating and your people on your payroll. Start your Employee Retention tax credit application online with ERC Today, or contact us with questions.