The Covid-19 pandemic has changed how we work, shop, live, and learn. For businesses, the pandemic created a new set of challenges.
From safety mandates to logistics issues to staying profitable, there are plenty of challenges for today’s business owners. The good news is that despite these challenges, a large number of new startups are popping up around the country.
If you started a business after February 15, 2020, you may be eligible for the Employee Retention Credit (ERC). A qualifying “recovery startup business” can receive a substantial tax credit.
If you’re wondering about qualifying for tax credits, we can help! Here’s a look at how the ERC could help your business.
What Is the Employee Retention Credit?
The ERC is an IRS refundable tax credit based on a percentage of the qualified wages you pay your employees. It’s government-funded and was created to help business owners weather the economic hardships of the Covid-19 pandemic.
It came from the CARES Act of 2020, just like The Paycheck Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL). But the ERC is even better for business owners than those programs.
Why? Unlike the PPP and EIDL, the ERC doesn’t require business owners to pay the money back or spend it in a certain way.
ERC Recovery Startup Business Definition
Based on the American Rescue Plan Act, a business that opened during the Covid-19 pandemic may be eligible to receive the credit. The qualifying factors include:
- You started a business on or after February 15, 2020
- Your annual gross receipts don’t exceed $1 million
- You employ one or more employees
Will My Business Qualify?
The application process for a Recovery Startup Business is relatively straightforward. Some essential criteria include:
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- You must employ one or more employees (Not including family or owner)
- You began operations on or after February 15, 2020
- The business must have an average annual gross receipts of $1 million or less for the three prior tax years.
- You must not be eligible under any other ERC requirements
- You paid employees during the 3rd and 4th quarters for 2021
- The business cannot be considered a “tax-exempt” organization under section 501(c) of the Internal Revenue Code.
- The business must have experienced either a full or partial suspension of operations due to government orders related to COVID-19 or had a significant decline in gross receipts.
New Business Startup Owners
If you started your business during the 2nd quarter of 2021, you aren’t eligible to claim any credits for 2020 or the first two quarters of 2021. However, businesses that meet the government restriction criteria or new revenue reduction may be eligible for credit for earlier quarters.
What Can My Business Claim?
The ERC for 2020 is 50% of all qualified wages you paid your employees from March 12, 2020 to December 31, 2020. There’s a limit of $10,000 in wages per employee for each quarter.
For 2021, the available credit is for 70% of qualified wages you paid your employees from January 1, 2021, to September 30, 2021. There’s a set limit of $10,000 in wages for each employee for any quarter.
This means you can claim up to $7,000 per employee per quarter. The maximum allowed credit is $21,000 for each employee.
If your business is deemed a recovery startup business, the total credit allowed is $50,000 per quarter. Any wages you paid through December 31. 2021 are eligible.
You are no longer limited to wages you paid by September 30, 2021. A recovery startup business is one that began operating after February 15, 2020, and has annual gross receipts not exceeding $1 million.
What Are Qualified Wages?
Typically, qualified wages are the compensation you pay your employees. This includes qualifying health plan expenses.
The definition also depends on how many people you employed in 2019. If you weren’t in business then, it depends on your average number of employees in 2020.
If you provide health benefits to non-working employees, those benefits may be considered qualified wages. These benefits vary depending on your insurance status.
If group health care costs are the determining factor for whether you qualify for this credit, it’s a good idea to consult an ERC expert for assistance.
2021 Eligibility Updates
For consideration for the ERC, more than a nominal portion of your business operations must have been suspended. Under eligibility rules, a portion is considered more than a nominal portion of business operations.
The gross receipts from that portion of operations aren’t less than 10% of the gross receipts. In addition, an employee’s service hours are 10% less than the total number of hours performed by all employees.
How to Claim ERCs
Although the program ended in 2021, business owners can still claim ERC. You can claim this credit by filing out form 941 when you file federal taxes.
Some businesses don’t realize they qualify for the credit. If you received a Paycheck Protection Program loan, you may still qualify.
If you received approval for loan forgiveness, you cannot claim the credit for employee wages that you paid with a PPP loan. If you received a denial for loan forgiveness, you can use wages you paid from a PPP loan to claim the ERC.
If you have already filed your taxes and now realize you are eligible, it’s not too late. You can apply retroactively by filling out the Adjusted Employer’s Quarterly Federal Tax Return (941-X).
Assistance With the Employee Retention Credit
Covid-19 brought so many changes to the way we live and work. Business owners were hit hard. The government recognized the need for the Employee Retention Credit.
If you haven’t claimed this credit, you may still qualify as a recovery startup business. The changing rules and regulations can be confusing.
Rather than dealing with the hassle and red tape of claiming the credit on your own, enlisting the help of a tax professional can ensure you receive this credit if you do qualify.
If you’re having difficulty applying for the ERC, we can help! At ERC Today, we work with companies nationwide to help them maximize their Employee Retention Credit.
Contact us today to see how we can assist you.
FAQs about the Recovery Startup Business ERC
The ERC is a refundable tax credit that was introduced by the CARES Act in March 2020 to help businesses keep employees on their payroll during the COVID-19 pandemic.
A Recovery Startup Business is defined as a business that was established after February 15, 2020, and has an average annual gross receipts of $1 million or less for the three prior tax years.
To be eligible for ERC, a Recovery Startup Business must have experienced either a full or partial suspension of operations due to government orders related to COVID-19 or had a significant decline in gross receipts.
A qualifying business can receive up to $50,000 in tax credits per quarter under ERC.
The ERC program has been extended through December 31, 2021, as part of the American Rescue Plan Act passed in March 2021.
Yes, businesses that received PPP loans can still claim ERC; however, they cannot use the same wages to calculate both PPP loan forgiveness and ERC.
No, if you meet all eligibility criteria and accurately claim your tax credits under ERC, you do not need to repay them.
The ERTC is worth up to $5,000 per employee for 2021, which is 50% of qualifying wages up to $10,000. For every quarter of 2021, the credit is worth up to 70% of qualifying wages up to $10,000, meaning you could receive up to $28,000 per employee for the year.
The Employee Retention Credit (ERC) defines small employers as businesses with 100 or fewer full-time employees for 2020 and 500 or fewer full-time employees for 2021. Large employers are defined as businesses with more than 100 full-time employees for 2020 and more than 500 full-time employees for 2021.
Congress and the IRS have set a limit on the Employee Retention Credit (ERC) for recovery startups at $50,000 per quarter. This means that companies can receive up to $50,000 in Q3 and Q4 of 2021.
According to Code Section 3134(c)(5)(A), a recovery startup business is an employer that started operating after February 15, 2020. The determination of when an employer began carrying on a trade or business follows the same rules as for section 162.
