What is the employee retention credit for new businesses started during 2020?
In 2020, amidst the COVID-19 pandemic, starting a new business meant facing unprecedented challenges. To support these new ventures and encourage employee retention during these trying times, the federal government has introduced the Employee Retention Credit (ERC), a refundable tax credit for eligible employers.
If you started a business after February 15, 2020, you are still able to benefit from this financial relief program. You can still claim the employee retention credit retroactively in 2023, 2024, and 2025.
Breaking News Update to Employee Retention Credit for New Businesses Started in 2020: The IRS temporarily paused processing ERC Claims for the remainder of 2023 due to companies charging fees based on a percentage of the refund amount of their Employee Retention Credit claimed, plus a list of other reasons.
We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
Even though IRS processing has temporarily paused, you will still want to file now (if you qualify) because the IRS will resume processing tax credit claims in the order they are received.
Business owners that have not filed for the ERC Credit yet? DLA will provide a Free ERC Consultation where we’ll do a deep-dive analysis to determine if you even qualify for tax credit. Everything we do is by-the-book per IRS rules and guidelines.
Understanding The Employee Retention Credit for New Businesses Started in 2020
The Employee Retention Credit (ERC) is a fully refundable tax credit, tax refund, or credit against certain employment taxes that provides eligible small businesses with financial assistance during the COVID-19 pandemic.
What Is The Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a valuable financial lifeline designed to help small and medium-sized businesses keep their employees on payroll during the economic downturn caused by the COVID-19 pandemic.
Essentially, the ERC allows qualified businesses to receive a credit equal to 50% of an employee’s wages, up to $10,000 per employee. This support helps struggling companies maintain their workforce and fosters economic stability within communities that widespread layoffs could impact.
Eligibility Requirements For Small Businesses
To qualify for the Employee Retention Credit, small to medium-sized business owners must meet certain criteria set forth by the Internal Revenue Service (IRS). These eligibility requirements include the following:
1. Experiencing a full or partial suspension of operations due to a COVID-19-related government order.
2. Suffering a significant decline in gross receipts during a calendar quarter compared to the same calendar quarter in 2019. According to IRS guidelines, this decline should be at least 50% for 2020 and 20% for 2021.
3. Being considered an eligible employer includes businesses with fewer than 500 full-time employees, tax-exempt organizations, and all recovery startup businesses that commenced after February 15, 2020.
4. Not receiving Paycheck Protection Program (PPP) loan forgiveness during the same period qualified wages were paid. This is particularly important as PPP funds, and ERC cannot both be claimed on the same wages.
5. Complying with all relevant federal and state labor laws and wage requirements outlined by the Department of Labor.
To increase your chances of qualifying for the Employee Retention Credit, small to medium-sized business owners need to familiarize themselves with these criteria while monitoring their financial health and carefully documenting any reductions in revenue or changes in operation due to COVID-19 restrictions.
Credit Amount For 2020 And 2021
The Employee Retention Credit (ERC) has undergone some changes in its credit amount from 2020 to 2021. As a small to a medium-sized business owner, it is crucial to understand the differences in the credit amounts for these years to maximize your benefits.
|Year||Credit Amount (% of qualified wages)||Maximum Credit Amount (per employee)||Maximum Qualified Wages (per employee)|
|2021 (Q1 and Q2)||70%||$7,000 (per quarter)||$10,000 (per quarter)|
|2021 (Q3 and Q4)||70%||$7,000 (per quarter) for most businesses; the amount for recovery startups is unclear||$10,000 (per quarter)|
As the table above shows, the ERC credit amount increased from 50% of qualified wages in 2020 to 70% in 2021 for both Q1 and Q2 and Q3 and Q4. The maximum credit amount for each employee also increased from $5,000 in 2020 to $7,000 per quarter in 2021, significantly enhancing the financial relief provided to businesses. Remember that the maximum credit amount for recovery startup businesses is currently unclear, so seek professional advice to ensure accurate calculations and compliance.
Qualifying For The Employee Retention Credit
To qualify for the Employee Retention Credit as a new recovery startup business that started in 2020, you must meet the definition of a recovery startup business and demonstrate financial hardship due to COVID-19.
Definition Of Recovery Startup Business
A recovery startup is a new business that began operations after February 15, 2020, with average annual gross receipts of no more than $1 million. Additionally, the recovery startup business must have experienced a decline in gross receipts of at least 90% compared to the same quarter in the previous year due to COVID-19-related circumstances.
For example, suppose John started a software development company in September 2020 with an average annual gross receipt of $500,000. Due to COVID-19 restrictions and market downturns, his company suffered over 90% decline in revenue during the second quarter of 2021 compared to the second quarter of 2019.
Recovery startup businesses qualify and can claim up to $50k per calendar quarter as part of their retention credit benefits if they meet specific eligibility criteria outlined by the IRS notice related to the ERC program under CARES Act introduced last March.
Financial Hardship Due To COVID-19
The COVID-19 pandemic has caused significant financial hardship for many businesses, especially startups. To qualify as a recovery for the Employee Retention Credit (ERC), a business must demonstrate that they have experienced a decline in gross receipts or were subject to government restrictions on operations due to COVID-19.
For example, if a small to medium-sized business had to close its doors temporarily due to lockdown measures, resulting in a decline in revenue, it may be eligible for the ERC. Alternatively, if a new business struggled to generate sufficient income during its first year of operation due to the pandemic’s economic impact, it may qualify for the credit.
How New Businesses Started In 2020 Qualify as Recovery Startup Businesses
New businesses started in 2020 may qualify for the Employee Retention Credit if they meet certain criteria. Here’s how:
1. Definition of a recovery startup business: A recovery startup trade or business is a business that began operations or carried on any trade or business after February 15, 2020, and has average annual gross receipts of $1 million or less.
2. Financial hardship due to COVID-19: The business must have experienced either a full or partial suspension of operations due to government orders related to COVID-19 OR a significant decline in gross receipts (i.e., 50% or more decline compared to the same quarter in the prior year).
3. How new businesses started in 2020 qualify as recovery startups or startup businesses, first: If a new business meets the definition of recovery startups or startup businesses and has experienced financial hardship due to COVID-19, then it may be eligible for the Employee Retention Credit. The credit amount equals 50% of qualified wages paid to employees, up to $5,000 per employee for all quarters combined.
4. Eligibility requirements: To qualify as a recovery, the new business must also have had an average number of full-time employees in 2019 that was not greater than 500.
5. Timeline for claiming the credit: Eligible new businesses can claim the credit on their quarterly employment tax returns (Form 941) starting from the third and fourth quarter of 2020 until December 31, 2021.
It’s important for new businesses that started in 2020 to understand their eligibility for the Employee Retention Credit and take advantage of this valuable opportunity to offset their payroll taxes and maintain financial stability during these challenging times.
The Benefits Of ERC For Business Started in 2020
The Employee Retention Credit offers tax credits to eligible new businesses, which can help them maintain financial stability and offset some of the costs associated with retaining employees during these difficult economic times.
Tax Credit Amount And Calculation
The Employee Retention Credit is a generous tax credit that can help new businesses with retention efforts during the challenging economic times brought about by COVID-19.
The credit amount for eligible employers is 50% of qualified wages paid between March 13, 2020, and December 31, 2021. Qualified wages refer to compensation paid to employees not working due to full or partial suspension of business operations or a significant decline in gross receipts.
For example, if your business had ten employees who were each paid $10,000 in qualified wages during a given quarter in which your gross receipts declined by at least 20%, your total credit would be $50,000 (that’s ten employees x $5,000).
Claiming The Credit
To claim Employee Retention Credits (ERC), eligible businesses must report the credit on their employment tax returns. Here are the steps to follow to claim the credit:
1. Calculate the amount of ERC your business is eligible for based on the qualified wages of paid employees during each calendar quarter.
2. Offset your payroll tax deposits by the amount of the ERC for which you are eligible.
3. If your ERC exceeds your payroll tax deposits, you can file Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance payment from the IRS.
4. Report the amount of ERC claimed on Form 941, Employer’s Quarterly Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees.
5. Keep detailed records and documentation to support your ERC claim.
Remember that claiming the ERC may impact other COVID-19 relief programs, such as PPP loans, so it’s important to consult a tax professional before taking action. Additionally, take timely action and meet all deadlines to avoid missing out on this valuable credit opportunity.
How The Credit Can Help With Financial Stability
The Employee Retention Credit can be a game-changer for small businesses struggling financially due to the pandemic. By offsetting certain payroll taxes due, the credit frees up valuable funds that can be used to keep employees on the payroll and cover other necessary expenses.
For instance, if your eligible business paid $50,000 in qualified wages during a calendar quarter, you could receive a tax credit of $25,000.
In addition to keeping your employees employed and helping with cash flow, taking advantage of the Employee Retention Credit may also improve your bottom line in the long run.
To maximize the benefits of the Employee Retention Credit for new businesses started in 2020, business owners can:
1. Claim the maximum credit possible by analyzing qualified wages and eligible employees.
2. Use the credit to offset payroll taxes, providing immediate relief and preserving cash flow.
3. Keep accurate records of all expenses related to employee retention and document eligibility criteria to avoid any potential audit issues.
4. Seek professional advice from a tax expert or CPA to ensure full compliance with all regulations and maximize available benefits.
5. Consider using other available COVID-19 relief programs in conjunction with the ERC, such as PPP loans or economic injury disaster loans, to provide additional financial support to the business.
6. Ensure timely submission of claims for the credit and keep up-to-date with any changes or extensions that may occur due to government legislation or guidance.
By following these tips, small to medium-sized business owners can ensure they are taking advantage of all available benefits from the ERC while maintaining compliance with all regulations and maximizing their chances for financial stability during these uncertain times.
Qualifying Wages For The Employee Retention Credit
Businesses can claim the Employee Retention Credit for wages and compensation paid to eligible employees from March 13, 2020, through December 31, 2021.
What Types Of Wages Qualify?
The following types of wages qualify for the Employee Retention Credit:
1. Compensation paid by an eligible employer to employees, including salaries, wages, and tips.
2. Employer contributions to employee health plans.
3. Amounts withheld from employee pay for federal income taxes, the employee share of the Social Security and Medicare taxes, and certain payroll and railroad retirement taxes.
4. Employer payments for group health plan coverage, including qualified sick or family leave wages.
5. Contributions to a defined benefit plan attributable to the period during which the qualified wages are paid or incurred.
It is important to note that cash tips received by an employee may also be considered qualified wages. Additionally, eligible employers can retroactively claim the credit on their employment tax returns up to three years after the due date of those returns or the date they were filed, whichever is later.
Maximum Credit Amount
The maximum Employee Retention Credit (ERC) a business can receive is $5,000 per employee for 2020 and $7,000 for 2021. This means businesses with 100 or fewer employees can potentially receive up to $7,000 per employee in employee retention credit for new businesses started in 2020 for each year.
Small and medium-sized business owners need to take advantage of this tax credit as it can provide much-needed financial relief during these challenging times.
By offsetting revenue reduction in the payroll taxes with revenue reduction in the ERC, businesses may be able to retain their workforce and increase overall stability.
The Interaction Of ERC With Other COVID-19 Relief Programs
The Employee Retention Credit may interact with other COVID-19 relief programs, such as PPP loans, and businesses should be aware of how the credit affects other credits and deductions.
PPP Loans And The Employee Retention Credit
Businesses that received PPP loans can still be eligible for the Employee Retention Credit, but some restrictions remain. The same wages cannot be used to qualify for both the PPP loan forgiveness and the ERC, so businesses need to carefully consider which program would give them greater benefits.
If a business has already applied for and received PPP loan forgiveness, it may still be able to claim the ERC on any remaining qualifying wages. Additionally, if a business was not eligible for a PPP loan or did not receive one, it may still be eligible for the ERC.
How The Employee Retention Credit Affects Other Credits And Deductions
The Employee Retention Credit (ERC) can affect other credits and deductions for which small business owners may be eligible. Here are some points to keep in mind:
1. PPP loans and the ERC: If a business receives a Paycheck Protection Program (PPP) loan, it can still claim the ERC, but not on the same wages paid with PPP funds.
2. Interaction with other tax credits: The ERC cannot be claimed on the same wages as other tax credits like the Work Opportunity Tax Credit or Federal Empowerment Zone credits.
3. Effect on the deduction for payroll taxes: Eligible employers can reduce their deduction for payroll taxes by 50% of the qualified wages taken into account for determining the ERC.
4. Timing of claiming credit: If a business claims the ERC, it cannot claim a credit or deduction related to those same wages in another quarter.
5. Impact on state tax liability: Businesses should consult their tax advisors about how claiming the ERC could affect their state and local tax liabilities.
It’s important for small business owners to understand how claiming the ERC could impact their overall tax strategy and to speak to their tax advisor to maximize benefits while remaining compliant with all regulations.
Record-Keeping And Documentation Requirements For ERC Claims
Proper record-keeping and documentation are crucial for businesses claiming the ERC, as it helps ensure compliance and prevents any potential issues with the IRS.
What Records Need To Be Kept?
Proper record-keeping is important when claiming Employee Retention Credit. Here are some records that small business owners need to keep:
1. Documentation showing the average number of employees and their wages for each quarter in 2020 and 2021.
2. Proof of eligible expenses incurred and paid during the applicable calendar quarters.
3. Records showing any non-eligible expenses included in qualified wages or health care expenses.
4. Evidence of financial hardship from COVID-19, such as bank or income statements.
5. Documents demonstrating compliance with applicable government restrictions or suspensions.
By keeping these records, small business owners can ensure their eligibility for credit and avoid any potential claims or audits from the IRS. It’s also recommended to consult with a professional tax advisor to ensure proper documentation and compliance with all regulations.
How Long Should Records Be Kept?
Businesses must keep accurate records of their expenses and wages when claiming the Employee Retention Credit (ERC). Records must be kept for at least four years after taxes are due or paid, whichever comes later.
This includes records related to determining eligibility for the credit, such as documentation showing a decline in gross receipts or government restrictions on existing business operations.
It also includes records supporting the number of qualified wages paid during each calendar quarter and any claim forms filed with the IRS.
How To Record And Document ERC Expenses
Businesses must properly record and document their expenses to claim the Employee Retention Credit. Here are some tips for recording and documenting ERC expenses:
1. Keep accurate records of all qualified wages paid during eligible quarters.
2. Separate qualified wages from non-qualified wages to ensure accuracy in calculating the ERC.
3. Maintain documentation demonstrating the business claim of the decline in gross receipts or full or partial suspension of business operations that qualify the business claim for the ERC.
4. Ensure that any payroll tax refund or deposits reduce payroll tax liability by the amount of the anticipated credit.
5. Use Form 941 to claim the credit quarterly and report qualified wages and related payroll taxes.
6. Keep records for the taxable year or at least the taxable year for four years after filing a tax return claiming the ERC.
Remember that proper record-keeping is essential to claim the full benefit of the Employee Retention Credit. By maintaining complete and accurate records, businesses can ensure compliance with IRS requirements and maximize their available tax credits.
Key Dates To Keep In Mind
It’s important to remember the timeline of the CARES Act and Employee Retention Credit, as well as the deadline for claiming the credit.
Timeline Of The CARES Act And The Employee Retention Credit
The CARES Act was signed into law on March 27, 2020, providing financial relief to businesses affected by the COVID-19 pandemic. The Employee Retention Credit (ERC) was introduced as part of the CARES Act and has been extended and modified by subsequent legislation. Here is a timeline of important dates related to the ERC:
1. March 27, 2020: The CARES Act is signed into law, introducing the ERC for eligible employers.
2. April 1, 2020: The ERC becomes effective and is available for wages paid after this date.
3. December 31, 2020: The original expiration date of the ERC under the CARES Act.
4. December 27, 2020: The Consolidated Appropriations Act extends and modifies the ERC through June 30, 2021.
5. March 11, 2021: The American Rescue Plan Act extends and expands the ERC through December 31, 2021.
6. July-September 2021: Eligible employers with gross receipts that are less than 80% of their gross receipts for the same quarter in 2019 may claim a recovery startup business credit of up to $50,000 per quarter.
7. January-December 2021: Eligible employers can claim a refundable tax credit of up to $7,000 per employee per quarter for wages paid between January and December 2021.
8. April-September/October/November/December 2021: Employers with one or more employees than an average of 500 employees in the calendar year 2019 and one or more employees than $1 million in annual gross receipts in the calendar year 2019 who experience a decline in average annual gross receipts or, of more than 90% compared to their gross receipts in Q2/Q3/Q4-Q2/Q3/Q4 respectively in the calendar year 2019 have a different set of rules for qualified wage determination.
Small to medium-sized business owners should be aware of these key dates and rules to maximize the benefits of the Employee Retention Credit.
Deadline For Claiming The Credit
Small businesses need to take note of the deadline for claiming the Employee Retention Credit (ERC). The credit can be claimed on eligible wages paid between March 12, 2020, and December 31, 2021.
Business owners must file their taxes promptly to ensure timely filing and avoid missing out on potential credits that could help with financial stability during these trying times caused by COVID-19.
Additionally, proper documentation and record-keeping are crucial when claiming this tax credit.
Small business owners should seek professional advice from qualified experts who can guide them through applying for ERC effectively without making mistakes so they can maximize their benefits from receiving IRS incentives.
Importance Of Taking Timely Actions
Small and medium-sized businesses must take timely actions when claiming the Employee Retention Credit (ERC) for their new business that started in 2020.
The deadline for claiming credit is rapidly approaching, so being proactive can make all the difference in receiving financial assistance during these tough times. It’s important to keep track of all eligible wages paid, document expenses properly, and work with professionals who understand the intricacies of this tax credit program.
Additionally, businesses need to stay up-to-date on eligibility criteria changes made by the federal government, as they can significantly impact qualifying for this valuable credit.
Common Pitfalls To Avoid When Claiming The Employee Retention Credit
It’s important to understand businesses’ common pitfalls when claiming Employee Retention Credit, such as ineligible wages and expenses, improper documentation and reporting, and non-compliance with eligibility requirements.
Understanding Ineligible Wages And Expenses
It is important for small to medium-sized business owners to understand what type of wages and expenses may not qualify for the Employee Retention Credit. Here are some examples:
1. Wages paid to family members: Any wages paid to family members who own more than 50% of the business do not qualify for the credit.
2. Sick leave and vacation pay: These paid leave are not considered qualified wages for the credit.
3. Severance pay: Any severance pay given to employees laid off or terminated does not qualify for the credit.
4. Wages of paid employees with forgiven PPP loan funds: If an employer received a PPP loan and used the funds to pay employee wages, those employee wages cannot be counted towards the ERC.
5. Wages paid to ineligible employees: The credit only applies to wages paid to eligible employees retained during a qualifying period. Ineligible employees include government officials and their family members.
Business owners must keep accurate records of all expenses related to claiming the ERC to ensure compliance with IRS guidelines. By understanding ineligible wages and expenses, businesses can maximize their benefits and avoid common pitfalls when claiming credit.
Proper Documentation And Reporting
Proper documentation and reporting are critical when claiming Employee Retention Credit for your new or existing business. The IRS requires businesses to maintain accurate records of all qualified wages, eligible employees, and credit calculations.
It’s essential to note that inadequate record-keeping could result in an audit, which may lead to penalties and additional costs. You should also keep detailed backup documentation for payroll tax filings and other related documents supporting your claim.
To ensure compliance when claiming the Employee Retention Credit, it is important to understand the eligibility requirements and maintain proper documentation. Eligible businesses must have experienced a significant decline in gross receipts or have been fully or partially suspended due to government restrictions related to COVID-19.
Proper record-keeping is essential for claiming credit and complying with IRS regulations. Businesses should keep records of eligible wages, proof of a significant decline in gross receipts, and any other necessary documentation for at least four years after filing their tax return.
Seeking professional advice can help small business owners avoid common pitfalls when claiming tax credits like ERC.
Additional Resources For New Businesses During The COVID-19 Pandemic
Explore the IRS guidance and resources available for new businesses during these trying times and other tax credit programs that can provide much-needed relief.
IRS Guidance And Resources
1. The IRS website offers a detailed FAQ section on the ERC, which includes information on eligibility requirements, credit amounts, and qualified wages. The IRS provides helpful guidance and resources for businesses to understand Employee Retention Credit. Here are some of their resources:
2. The IRS has issued several notices related to the ERC program, including Notice 2021-23, which guides the extension of the credit under the American Rescue Plan Act.
3. The IRS also offers webinars and virtual workshops for businesses to learn more about the ERC program and how it can benefit them.
4. Businesses can use the IRS’s interactive tool to help determine if they qualify for the ERC and calculate their potential credit amount.
5. The IRS has recently updated Form 941, Employer’s Quarterly Federal Tax Return, to include additional reporting requirements for businesses that claim the ERC.
As a small to medium-sized business owner, staying informed about the latest updates and guidance from the IRS regarding the Employee Retention Credit program is important. Utilizing these resources can help maximize your benefits while complying with all applicable regulations.
Other Tax Credit Programs Available For Small Businesses
Small businesses may be eligible for other tax credit programs besides the Employee Retention Credit. These include:
1. Work Opportunity Tax Credit (WOTC): This credit is available for businesses that hire individuals from certain target groups, such as veterans, ex-felons, or long-term unemployed individuals.
2. Small Business Health Care Tax Credit: Eligible small businesses that provide health insurance to their employees may qualify for this credit.
3. Research and Development (R&D) Tax Credit: This credit encourages businesses to invest in research and development activities.
4. New Markets Tax Credit (NMTC): This credit is available for businesses that invest in designated low-income communities.
5. Disabled Access Credit: Eligible small businesses can take advantage of this credit to help cover costs associated with making their facilities accessible to disabled individuals.
6. Energy Efficiency Tax Credits: Small businesses that invest in energy-efficient equipment or property improvements may be eligible for these tax credits.
By exploring these tax credit programs, small business owners can find additional ways to save on taxes and improve their financial stability.
Importance Of Seeking Professional Advice
It is important for small to medium-sized business owners to seek professional advice when it comes to claiming Employee Retention Credit. While credit can be a valuable tool for businesses facing financial hardships due to COVID-19, navigating the eligibility requirements and documentation can be overwhelming without proper guidance.
Seeking advice from a knowledgeable tax professional or accountant familiar with this specific program can help ensure your business maximizes its benefits while maintaining compliance with IRS regulations.
For example, eligible wages and expenses must be carefully documented, and failing to do so could result in lost credits or tax audits. Furthermore, understanding how other COVID-19 relief programs like PPP loans interact with ERC credits is crucial to claim both benefits effectively.
Conclusion and Summary for the Employee Retention Credit For New Businesses Started in 2020
In conclusion, the Employee Retention Credit is a valuable program that can provide financial relief to new businesses that started in 2020. By offering a tax credit for retaining employees, businesses can benefit from infrastructure investment and jobs from recovery startup businesses from increased infrastructure investment and recovery startup businesses and stability during these uncertain times.
Small and medium-sized business owners should take advantage of this opportunity by understanding the eligibility requirements and properly claiming the credit. With careful planning and documentation, businesses can maximize their benefits and overcome common pitfalls when claiming the ERC.
Remember to seek professional advice and utilize available resources from the IRS to ensure compliance with all guidelines.
Good news. There is still time to file! The employee retention tax credit can still be claimed retroactively and there is still time to file, even in 2023, 2024, and 2025 for the past tax years.
Employee Retention Tax Credit (ERC / ERTC) Help: Claim Up To a $26,000 Refund Per Employee for Your Business
Disaster Loan Advisors™ can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program, without you having to pay an excessive percentage of your hard earned ERC refund.
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Depending on eligibility, business owners can receive up to $26,000 to $33,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable IRS tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount $ of employee retention tax credit your company qualifies for.