Employee Retention Credit: 10 Common Misunderstandings of Startups

employee retention credit
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Even with Covid-19 running rampant, 4.4 million new companies began operations in 2020. That same year, 77% of startup founders said they were facing failure due to the pandemic. Small businesses in the U.S. employ 47.3% of the private workforce.

Before Covid, about 37% of startups opening between 2000 and 2020 went out of business. The reason—they ran out of capital. Recognizing the importance of these small companies and the impact of Covid-19 on the workforce, the government enacted the Employee Retention Credit Act (ERC).

What is the Employee Retention Credit? It is a refundable tax credit for startups and long-standing businesses suffering financial impact from Covid-19. It’s not a loan, it’s a tax credit that does not have to be paid back.

If you are a recovery startup business for the employee retention credit, you receive special consideration for eligibility.  We are going to share ten misunderstandings relating to ERC.

What Is a Recovery Startup Business?

The term “recovery startup business” is applicable to any business that:

  1. Began operating as a business after February 15, 2020, and
  2. Annual gross receipts averaging $1,000,000 or less, and
  3. Employs one (1) or more employees, and
  4. Does not qualify as eligible using other criteria

If you meet the above requirements, you qualify for ERC. Recovery startups have a different recovery amount than standard small businesses.

A recovery startup may claim a maximum credit of $50,000 per quarter for Q3 and Q4 of 2021. Qualifying wages include amounts paid for group health care.

1. ERC a Recovery Startup Business Can Get

Your startup business can save up to $7,000 per qualifying employee per quarter. The total savings for a startup is capped at $50,000 per quarter.

Depending on the total number of employees you have and their wages, you have a potential recovery of $50,000 per quarter. You have two quarters to apply for this credit. If you max it out in both Q3 and Q4 in 2021, you may receive $100,000 in payroll tax credit.

If you haven’t claimed this credit, get in touch with ERC Today and apply for employee retention credit before the deadline.

2.  You Can Claim ERC if You Have PPP Loans

When Congress enacted the Consolidated Appropriations Act (CAA) of 2021 it abolished prior restrictions. Before that time businesses were only able to participate in the Payroll Protection Program (PPP) or ERC. The CAA makes it possible to apply for both.

A PPP loan only takes into consideration 2-1/2 times your monthly payroll expenses. The loan is designed to be spread out over a six-month period. That leaves a lot of unclaimed wage expenses you can recover by applying for ERC.

3. You Do Not Need a 50% Reduction

The original qualification of a 50% reduction in receipts between 2019 to 2020 no longer exists. You can now qualify with a 20% reduction in receipts.

The qualifying percentages vary from 20% to 90% depending on the quarter. There are other factors that affect the ability to collect ERC, including making sure that the claims cover only qualifying employee wages.

4. You Can Qualify With a Partial Shutdown

Many business owners believe they don’t qualify unless their business was completely shut down during the pandemic. Your business may qualify if it was subject to a partial suspension order from your local, state, or federal government.

Situations that may qualify you for ERC relief include:

  • Partial shutdown
  • Disruption to business
  • Unable to access equipment
  • Limited capacity
  • Supply chain shutodown
  • Vendor shutdown
  • Reduction in services
  • Reduction in hours to accommodation sanitation requirements
  • Shutting down of some locations

Did the government cause your business to experience a partial or full suspension? If that mandatory government suspension made your business unable to continue its full, normal activities, substantially impacting business operations, you qualify.

5. Essential Businesses Can’t Qualify

Even essential businesses suffer the impact of the pandemic. Perhaps you are open as an essential business, but your vendors are unable to deliver your supplies. Maybe you need to visit a client’s job site, but shutdown orders prevent you from completing that task.

These are scenarios that may qualify your company for ERC. You may also have a business where part of it remains open as essential, and another part is shutdown under government order.

6. Will the ERC Cause an Audit?

Your business accepting tax credits it qualifies for has no impact on whether the IRS selects you for an audit. The only reason you may hear higher numbers for audits of those accepting payroll tax credits is that so many businesses have not taken the IRS employee retention credit due to them. Fewer numbers of filers increase the percentages for audits.

If you keep accurate records and retain all supporting documentation, you have no concerns. The benefit of potentially getting $100,000 in tax credits outweighs the risk of an audit.

7. Sales Recovery Disqualification

If your sales recover for the first quarter of 2021, you can still qualify for credit. There is an option of looking back one-quarter prior when making a qualification determination.

To qualify, a review of lost revenue in 2020 is given consideration. Any full or partial suspensions are also given qualifying factors.

If your business grew during the pandemic, you may still be eligible for tax credits. You are not penalized from receiving a tax credit if you incur a partial or full government suspension.

8. My Tax Accountant/Payroll Service/CPA Took the Credit on My Annual Tax Return

Your CPA can be the best in the state, but they did not take the employee retention credit on your annual tax return. The credit is only available on Form 941, or by filing a Form 941X. The ERC is not part of your annual income tax return.

9. More Than 500 Employees Disqualifies My Business

The employee count uses the basis of a full time equivalent (FTE) worker. You need to consider the individual status of every employee, not just take a head count.

Any employees you paid wages to for not working, or for working less than the wage they received, don’t count under FTE.

10.  Does Acquisition of an Existing Business Qualify as a Startup?

If you open a new store, that qualifies as a startup. What if you purchase a restaurant or store that is already operating? The answer—that business is new to you, so you qualify.

The description Congress gave for a recovery startup business was an employer that began operating a trade of business after February 15, 2020. If you took over the business, you are a new employer.

Why You Need an ERC Professional

The employee retention credit provides you with the opportunity to recover thousands of dollars for employee payroll expenses. Since the CARES Act went into effect, there have been numerous chances to the law. Each change expands the ability to collect and makes more businesses eligible.

To apply or amend your filings, you must use the proper forms. The correct form depends on what step in the process your business is at. 

There is a three-year lookback period. You don’t want to miss the deadline or have a return not processed because you missed a step or made a mistake.

Learn where your business stands on qualifying for employee retention tax credit or a Paycheck Protection Program (PPP) loan.

File for Employee Retention Credit

At ERC Today we specialize in applications and amendments for the Paycheck Protection Program and the Employee Retention Credit. If you have questions, concerns, or believe you need to amend your filings, contact ERC Today.

We will review your records and assist you in recovering any tax credits you may be due.

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More Great Information For Employers:

On November 15, 2021, President Biden signed the Infrastructure Investment and Jobs Act into law, and the Employee Retention Credit sunset date was moved from 12/31/2021 date to 9/30/2021 (for businesses other than ARPA Recovery Startup Businesses). 

HOWEVER, this does not mean the ERC was eliminated! Eligible businesses can still apply for stimulus funds based on financials between 3/13/2020-9/30/2021.