The COVID-19 pandemic was tough on American businesses. The U.S. government was placing significant restrictions in the name of public health. However, Congress passed a number of bills to keep the economy afloat.
For this reason, the U.S. was able to endure the shortest recession in the nation’s history. It only lasted two months as government assistance kept money in consumers’ pockets.
The Employee Retention Credit (ERC) is one of those programs. Read on to learn how to claim the ERC for the third and fourth quarters of 2021. Explore topics such as what is ERC and how to claim it.
What Is The Employee Retention Tax Credit?
Before learning how to claim ERC, it is important to define what this tax relief program is. When the COVID-19 pandemic reached America’s shores, federal and state governments took unprecedented actions.
They ordered certain businesses to close their doors. Some companies drastically curtailed operations to maintain low store capacity and social distancing. Many business owners felt they had no choice but to lay off workers and reduce expenses.
However, the government developed a plan to protect workers and delay these difficult decisions. The ERC was authorized by the CARES Act, a bill passed by Congress during the COVID-19 pandemic. The primary objective of the legislation was to provide relief to businesses and workers negatively impacted by the virus.
The ERC encourages companies to keep their employees on the payroll. Employers can claim a tax credit on a percentage of employees’ qualified wages.
What Are The ERC’s Tax Benefits?
The ERC is a generous program that covered 50 percent or more of an employee’s qualified wages. Initially, the CARES Act provided a 50 percent tax credit for up to $10,000 of an employee’s qualified wages.
The CARES Act provided relief only for the calendar year 2020. Essentially, employers received up to a $5,000 tax credit per employee in 2020.
In 2021, Congress passed additional legislation to provide even more tax relief. The tax credit increased to 70 percent of an employee’s qualified wages.
It still counted towards $10,000 of an employee’s qualified wages but was now calculated on a quarterly basis. This means that the tax credit is now $7,000 per quarter for a total of $28,000.
One of the primary benefits of the ERC is that it does not need to be paid back. Other government relief programs like Payroll Protection Program (PPP) served as loans that required repayment.
Another benefit of ERC is that it reduced recurring employment tax deposits. Also, your business can secure advanced tax refunds. This is true so long as your company employs fewer than 500 workers.
Perhaps one of the most significant tax benefits is retroactively claiming credits not previously taken. This is accomplished via Form 941 when filing quarterly tax returns. The benefit is then received in the form of an advanced tax refund or by reducing your recurring employment tax deposits.
It is important to recognize that the ERC is not similar to filing income taxes. ERC payments are issued in cash by the IRS. The amount has nothing to do with how much profit your company made or a loss incurred.
What Is The Eligibility For The ERC?
There are few eligibility requirements for the ERC. Any sized business can apply for ERC.
Only a few types of businesses are not eligible. State and local governments cannot apply for ERC tax benefits. Also, small businesses that receive loans from the Small Business Administration (SBA) are also not eligible.
To receive aid, your company needs to demonstrate that its operations were fully or partially terminated due to the Covid-19 pandemic. To assist in this demonstration, the federal government requires gross sales receipts. The receipts need to show that sales were cut in half from the prior year.
As the nation returns to normalcy, your gross sales receipts are expected to rise as businesses reopen. Once sales return to 80% or more of what they used to be, your company is no longer eligible for ERC.
Is The ERC Program Still Active?
Many people are under the false impression that they can no longer claim the ERC. Under the Biden administration’s Infrastructure Investment and Jobs Act, the ERC was terminated at the end of September 2021. This led many to believe that the program’s benefits are no longer available.
However, the program’s benefits are accessed by submitting a 941-X Amended Quarterly Payroll tax return to the IRS. You can make amendments to a quarterly form for up to three years after its filing. Essentially, this means that the ERC program is still available up until September 2024.
How To Claim The ERC For Third And Fourth Quarters Of 2021?
Now that you know what the ERC is and whether your business is eligible, it is time to apply for the tax credit program. Receiving the government benefits is as simple as filing an amended quarterly payroll tax return.
There are services out there to help guide you through the process. Initially, you need to provide general information about your business. Other critical data collected is with regards to your staffing impacts. How many W-2s were issued in the prior year and what is the forecast for the following tax year?
Another question is whether partial owners are invested in other businesses. The intent of this question is to make sure that companies are not double-dipping on benefits or manipulating the system.
All businesses are reviewed by the IRS together. If the multiple businesses all meet the eligibility criteria, then ERC payments are issued. However, if one of the businesses is not eligible then none of them are.
Recapping The Employee Retention Tax Credit
You are now ready to claim ERC. This is a valuable government program that helps both employers and employees alike. Keeping workers on the payroll saves money in the long run as you do not need to train new employees and recoup lost productivity.
It also helps quickly pivot to full production capability. If your business needs help on how to claim the ERC in the third and fourth quarters of 2021, contact us today to schedule an appointment.