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 ERC, 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 ERC, 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. 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.
4 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:
1. Lots of Businesses Are Eligible
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.
2. Applicants Can Claim the ERC Immediately
Businesses can claim the credit right away by reducing payroll taxes sent to the IRS.
3. Refunds May Apply
You can request a refund if your credits exceed payroll taxes.
4. 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.
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. Common challenges for the employee retention tax credit include:
- Understanding business eligibility requirements
- Figuring out which wages qualify and getting the percentages right for the applicable year
- Making sure you apply correctly and by the deadline
- Completing the process when you own multiple businesses
- Filling out your tax forms accurately
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 the ERC
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.