As an employer, how do I know if I am eligible for the employee retention credit?
Business owners have been navigating the complex landscape of pandemic relief programs and have found it very challenging. One such program is the Employee Retention Credit (ERC), designed to help employers keep their workforce on payroll during these uncertain times.
If you have not already filed, you can still claim the employee retention credit retroactively in 2023, 2024, and 2025.
Key ERC Credit Takeaways You Will Learn:
- Eligibility for ERC: Learn how businesses affected by COVID-19 can still claim the Employee Retention Credit retroactively.
- Criteria for ERC Eligibility: Discover the significance of government-ordered shutdowns and a decline in gross receipts for eligibility.
- Ineligible Employers: Understand which types of employers, such as government entities and self-employed individuals, cannot claim the ERC.
- Maximizing ERC and PPP Benefits: Explore strategies for businesses to benefit from both the ERC and PPP loans effectively.
- Claiming the ERC: Guidance on filing Form 941, maintaining records, and meeting deadlines to claim the credit.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
Employers That are Eligible for the Employee Tax Retention Credit (ETRC)
The Employee Retention Credit (ERC) is a tax credit that encourages businesses to keep employees on payroll during the COVID-19 pandemic.
How Does the ERTC Works for Employers
The Employee Retention Credit (ERC) is a refundable tax credit that supports small to medium-sized business owners by reducing their financial burden during the COVID-19 pandemic.
To take advantage of this benefit, businesses can claim the ERC on their employment tax return through Form 941. If the tax credit amount surpasses owed employment taxes, then any excess funds will be refunded directly to the employer.
Significance of the ERC Credit for Businesses
Employee Retention Credit (ERC) plays a crucial role in helping businesses navigate the challenges posed by the COVID-19 pandemic. Providing significant financial relief to eligible employers allows them to retain their workforce and maintain a sense of stability during these uncertain times.
Moreover, the ERC is fully refundable – if an employer’s credit exceeds their employment tax obligations; any remaining amount gets refunded. This feature further reinforces its importance for businesses grappling with cash flow issues amid ongoing economic volatility.
Additionally, retaining skilled employees is vital for maintaining daily operations and ensuring a faster recovery of startup business once market conditions improve.
Lastly, organizations taking advantage of this generous tax incentive may have more flexibility in allocating resources towards growth opportunities and making strategic investments in areas like marketing or research and development.
Definition And Purpose of ERC for Employers That are Eligible
The Employee Retention Credit (ERC) is a refundable tax credit designed to help businesses keep their employees on payroll during the COVID-19 pandemic. It was established as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and extended through December 31st, 2021.
By offering eligible employers up to $5,000 per employee for wages paid in 2020 and up to $28,000 for wages paid in 2021, the ERC aims to alleviate some of the financial burdens small to medium-sized business owners face during these challenging times.
Employer Eligibility For ERC Tax Credit
To be eligible for the ERC, an employer must have experienced a partial or full suspension of operations due to government orders or a significant decline in gross receipts.
Partial Or Full Suspension Of Operations
If an eligible employer’s operations were partially or fully suspended due to government orders, they could claim the Employee Retention Credit (ERC). A partial suspension involves a significant decline in an employer’s gross receipts, while a full suspension refers to the complete cessation of an employer’s business operations.
For instance, if a restaurant was forced to shut down indoor dining by the state government during the pandemic but could still offer takeout and delivery services, it would qualify for ERC because its operations were partially suspended.
On the other hand, if a store had to close entirely due to COVID-19 restrictions or natural disasters like hurricanes and floods, then it would be considered fully suspended and eligible for ERC.
Decline In Gross Receipts
To be eligible for the Employee Retention Credit (ERC), an employer must have experienced a significant decline in gross receipts.
For example, if a small retail store had $100,000 in gross receipts during the second quarter of 2019 and only $70,000 in the second quarter of 2020 due to decreased sales caused by the pandemic, they would qualify for the ERC under this criteria.
It’s important for businesses to carefully track their gross receipts and determine if they meet this eligibility requirement before claiming the ERC on Form 941.
Government-Ordered Shutdowns
If your business was forced to shut down due to a government order, you are eligible for the Employee Retention Credit (ERC). This includes any mandatory closures or restrictions on businesses due to the COVID-19 pandemic.
For example, if state authorities ordered your restaurant to close indoor dining, you would be eligible for the ERC during that period.
To claim this refundable payroll tax credit amount, keep track of all wages paid during this closure period and include them in your application for the ERC.
Small Business Exemption
The Employee Retention Credit (ERC) has a small business exemption that allows businesses with fewer than 500 or fewer full-time employees to claim the credit even if they did not experience a significant decline in gross receipts.
This exemption only applies to wages paid from March 13th, 2020, to December 31st, 2020. However, for wages paid from January 1st, 2021, to December 31st, 2021, employers must meet either the full or partial suspension or complete suspension of operations test or the gross receipts test.
As a small business owner who wants to take advantage of this credit, it’s essential to understand how this exemption works and when it is available.
Qualifications For ERC In 2022 And Beyond
In 2022 and beyond, businesses may still be eligible for the ERC if they experience a significant decline in gross receipts or have partially or fully suspended their operations due to government orders.
To qualify for the credit, an eligible employer’s gross receipts must have decreased by more than 20% compared to the corresponding quarter in 2019. Additionally, qualified wages paid to employees during this period can include their regular pay, certain health plan expenses, and retirement plan contributions.
It is important to note that small employers with no more than 500 full-time employees may claim the ERC even if they did not experience a significant decline in gross receipts.
Types of Ineligible Employers For ERC
Certain types of employers are ineligible for the Employee Retention Credit (ERC), including government entities, self-employed individuals, and small business owners who received PPP forgiveness.
Government Entities (federal, state, or local government agency)
Government entities are not eligible for the Employee Retention Credit (ERC). This includes any federal, state, or local government agency or instrumentality providing services. However, government contractors and other businesses contracted to provide services to government agencies may be eligible for the ERC.
It’s essential to note that eligibility depends on whether the business meets other requirements for the credit.
Understanding who is ineligible for ERC is crucial when claiming tax credits, as doing so incorrectly could result in serious consequences such as penalties and interest on underpaid taxes.
Self-Employed Individuals
Self-employed individuals and sole proprietors are not eligible for the Employee Retention Credit (ERC). However, your business may still be eligible for the ERC if you have employees working for you.
As a self-employed individual or sole proprietor, you may be eligible for other COVID-19 relief programs such as the Paycheck Protection Program (PPP) or the Economic Injury Disaster Loan (EIDL).
It’s important to note that you cannot claim ERC if you receive PPP forgiveness.
Small Business Owners Who Received PPP Forgiveness
Small Business Owners who received PPP Forgiveness may be ineligible for the Employee Retention Credit (ERC) for wages paid to the same employees. The employee retention credit eligibility cannot be claimed for wages paid with forgiven PPP funds, which could affect eligibility for certain employers.
However, businesses that have not applied or been approved for PPP loan forgiveness can still claim ERC on eligible wages paid during the covered period if they meet all other requirements.
The interaction between PPP forgiveness and ERC can be complicated, but not understanding it could result in missing out on potential tax savings or facing audit penalties.
Small business owners should consult a tax professional or attorney to determine their options when considering both credits’ implications.
Interaction Between the ERC and a PPP Loan
Employers who received a Paycheck Protection Program (PPP) loan can still claim the Employee Retention Credit (ERC), but wages used for PPP forgiveness cannot be used towards ERC calculations.
How The ERC Works With The PPP
The Employee Retention Credit (ERC) can be used with the Paycheck Protection Program (PPP), a forgivable loan program offered to businesses affected by the COVID-19 pandemic.
However, any wages paid with forgiven PPP funds cannot be used for ERC calculations. This means that if a business received PPP forgiveness for wages paid to an employee, those same wages could not count towards eligible wages for calculating the ERC.
To maximize benefits from both programs, businesses should consider using the PPP funds primarily for non-payroll expenses, such as rent or utilities, while using eligible payroll expenses to claim the ERC.
It’s important to note that despite this interaction between programs, taking advantage of both can greatly benefit small to medium-sized businesses during these uncertain times by reducing financial burdens and protecting employees’ jobs.
Strategies For Maximizing Benefits From Both Programs
Businesses can strategically allocate their payroll expenses to maximize the benefits of both the Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP). For example, they can use PPP funds to cover non-eligible wages while claiming ERC for eligible wages.
Additionally, businesses can consult with a CPA or tax professional to ensure compliance with both programs’ requirements and optimize their claim amounts.
Calculating The ERC
The ERC is calculated based on 70% of qualified employee wages. There are specific limitations and requirements for what qualifies as eligible wages; to learn more about maximizing the benefits of this credit, continue reading.
Maximum And Refundable Amounts Of The ERC
The maximum and refundable amount of the Employee Retention Credit (ERC) a business can claim depends on the particular tax year. For the 2020 tax year, eligible employers can claim a maximum credit of up to $5,000 per employee.
In contrast, for the 2021 tax year, eligible employers can claim up to $28,000 per employee. It’s important to note that any excess credit beyond what an eligible employer already owes in employment taxes is fully refundable.
For instance, let’s say you’re eligible for a $10,000 ERC but only owe $8,000 in employment taxes after adjustments and other credits have been applied. The remaining $2,000 would be refunded by the IRS after filing Form 941.
Qualified Wages
To be eligible for the Employee Retention Credit (ERC), businesses must pay qualified wages to their employees. Qualified wages refer to compensation paid to an employee during the eligibility period, which starts on March 13th, 2020, and ends on December 31st, 2021.
For the ERC in 2021, qualified wages are capped at $10,000 per employee per quarter. This means that a business can claim up to $28,000 per qualified employee’s wages for the entire year.
Business owners should keep accurate records of all payments made as qualified wages since it impacts their eligibility and the maximum amount of credit claimable.
Business Size Limitations
Small businesses with fewer than 500 employees are generally eligible for the Employee Retention Credit (ERC). However, as of January 1st, 2022, businesses with no more than 500 full-time employees in each calendar quarter in the preceding calendar quarter or year may also be eligible for ERC.
It’s important to note that larger employers with more than 500 employees may still be able to claim the ERC under certain circumstances. For example, if their operations were fully or partially suspended due to COVID-19 restrictions or experienced a significant decline in revenues.
How to Claim The ERC for Eligible Employers
To claim the ERC, eligible employers must file Form 941 and maintain proper record-keeping practices; understanding the claiming process is crucial in maximizing benefits from this tax credit.
Filing Form 941
To claim the Employee Retention Credit (ERC), eligible employers must file Form 941, Employer’s Quarterly Federal Tax Return. Here are the steps to follow when filing Form 941:
1. Fill out Form 941 for the relevant quarter in which qualified wages were paid.
2. Enter total wages paid to all employees during the quarter, including any qualified wages claimed for ERC.
3. Calculate and report the employment taxes owed for the same quarter before reducing it by any ERC claimed.
4. Subtract the ERC amount from employment taxes owed and report the result on line 13b.
5. Claim any remaining ERC as a refundable credit on line 13d.
It is important to note that employers can only claim an ERC once per wage payment on Form 941 or by filing an amended return.
Also, employers who received a Paycheck Protection Program (PPP) loan cannot claim an ERC for wages paid using PPP funds that have already been forgiven.
By following these simple steps, small to medium-sized business owners can easily claim their eligible Employee Retention Credit on their employment tax return, maximizing benefits and protecting their businesses during uncertain times.
Record-keeping Requirements
To claim the Employee Retention Credit (ERC), eligible employers must keep records supporting their eligibility, including proof of qualifying employee wages. These records should include payroll tax filings and payment records, canceled checks, and other documentation that supports the amount of qualifying wages paid.
Proper record-keeping is vital to support ERC claims and avoid potential penalties from audits or inquiries from taxing authorities. Employers should consult with an experienced tax professional to ensure they understand all necessary record-keeping requirements related to ERC claims.
Deadlines And Timelines
Eligible employers must file Form 941, Employer’s Quarterly Federal Tax Return, to claim the ERC. The deadline for filing this form is at the end of the month following each quarter.
For example, the first-quarter advance payment deadline is April 30th, covering wages paid from January to March.
It’s important to keep accurate records of your payroll and employment tax deposits to ensure that you’re claiming the correct amount of credit. Additionally, businesses should retain all documentation related to their eligibility for at least four years after receiving payment from the ERC in case of an audit.
Benefits Of ERC For Eligible Employers
The benefits of ERC for employers include reduced financial burden, protection of employees’ jobs, and potential tax savings. By understanding the eligibility requirements and maximizing the benefits from ERC, businesses can protect themselves and their employees during uncertain times.
Reduced Financial Burden
The Employee Retention Credit (ERC) offers eligible small to medium-sized businesses a significant financial benefit. This tax credit aims to reduce the financial burden on employers who have faced a decline in gross receipts or, partial or full suspension of operations during the COVID-19 pandemic.
By claiming this credit, eligible businesses can receive up to $5,000 per employee for the 2020 tax year and up to $28,000 per employee for the 2021 tax year. The best part is that it’s fully refundable, meaning any excess is refunded directly to the business.
Protection Of Employees’ Jobs
One of the significant benefits of claiming the Employee Retention Credit (ERC) is that it helps small to medium-sized businesses protect their employees’ jobs. By providing financial support to employers, the ERC enables them to retain their workforce during these uncertain times.
Moreover, as employers retain their workforce with the help of ERC, this leads to increased employee loyalty and higher levels of job satisfaction. Employees who know they have job security may be more productive and committed to carrying out their duties.
Additionally, when a business retains its experienced personnel instead of hiring new ones later on after recovery from pandemic-induced economic challenges, additional costs related to recruiting, training, or induction processes can be avoided.
Potential Tax Savings
The Employee Retention Credit (ERC) offers small to medium-sized businesses the opportunity to receive a significant tax benefit. The credit is calculated based on wages paid to employees during the pandemic, and that amount can be used as a credit against employment taxes.
This means you could owe less in taxes or even receive a refund for any excess credit.
For example, if your business qualifies for $50,000 in ERC and owes $40,000 in federal payroll taxes, you will only have to pay $10,000 out of pocket. Any remaining amount over what you owe will be refunded directly back to your business.
Common Mistakes Employers Make With The ERC Program
Employers often make mistakes related to state tax implications, impact on employee benefits, and record-keeping practices when claiming the ERC; understanding these errors can help you maximize benefits from the program and avoid potential issues down the road.
State Tax Implications
It’s important to note that some states have versions of the Employee Retention Credit (ERC), so it’s crucial for small to medium-sized business owners to understand how state taxes may come into play when claiming this credit.
Additionally, employers need to know how claiming the ERC may impact other state unemployment or workforce programs they are enrolled in.
Understanding how the ERC interacts with state taxes is essential for maximizing potential benefits and avoiding unintended consequences.
Impact On Employee Benefits
Employers who claim the Employee Retention Credit (ERC) should consider how it impacts employee benefits. The ERC is calculated based on qualified employee wages during specific quarters, including sick and family leave payments mandated by the Families First Coronavirus Response Act.
For example, if an employer claims a credit for providing paid family medical leave under the Tax Cuts and Jobs Act of 2017, they cannot include that amount when calculating their ERC.
It’s important for employers to carefully track all wage expenses to ensure they accurately calculate their eligibility for credits and avoid double-dipping that could result in penalties or audits from the IRS.
Record-keeping Practices
Good record-keeping practices are essential for businesses claiming Employee Retention Credit (ERC). Accurate and detailed records of employee wages, including dates paid and amounts, must be maintained to support a claim for the ERC.
Employers should also keep track of any partial or full suspension of operations, government orders that affected their employer’s business operations, and gross receipts data.
Having well-organized records will help with ERC claims and come in handy during IRS audits or inquiries. It’s important to note that businesses have up to four years to retain employment tax records related to the ERC.
For example, George owns a small retail store and wants to claim the ERC for 2021. He keeps detailed records of his employees’ wages from March 13th through December 31st, along with documentation regarding his gross receipts decline due to COVID-19 restrictions.
Overall, good record-keeping practices can save time and potential headaches when claiming and complying with IRS regulations related to the ERC.
Conclusion and Summary Answering Which Employers Are Eligible For Employee Retention Credit?
In conclusion, understanding the eligibility requirements for the Employee Retention Credit (ERC) is crucial for small to medium-sized business owners looking to alleviate financial burdens and protect their employees during these uncertain times.
Businesses can take steps towards recovery and stability by maximizing benefits from ERC and other available programs.
Importance Of Understanding ERC Eligibility Requirements
As a small to a medium-sized business owner, understanding the eligibility requirements for the Employee Retention Credit (ERC) is crucial in maximizing benefits and avoiding costly mistakes.
The ERC is a valuable tax credit that can provide significant financial relief to eligible businesses during uncertain times.
To avoid any issues with claiming the ERC, it’s essential to understand the eligibility criteria thoroughly. For example, businesses must demonstrate a significant decline in gross receipts or have been partially or fully suspended due to government orders during specific periods.
By staying informed of these eligibility requirements and taking advantage of resources like the IRS’s ERC Eligibility Assistant tool, small to medium-sized business owners can ensure they are making informed decisions about applying for this critical tax credit.
Maximizing Benefits From ERC To Protect Businesses And Employees During Uncertain Times.
As a small to medium-sized business owner, maximizing the Employee Retention Credit (ERC) benefits can help protect your business and employees during these uncertain times.
One strategy is to combine the ERC with the Paycheck Protection Program (PPP) for increased financial relief. Using both programs can reduce your overall financial burden while keeping your employees on the payroll.
Another way is to ensure that you are claiming all eligible wages paid to employees from March 13th, 2020, to September 30th, 2021, or until December 31st, 2021 for recovery startup companies. You should also maintain accurate records of all qualified expenses related to employee retention and claim the employee retention tax credit on Form 941 promptly.
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.
DLA doesn’t charge a percent like many companies do. Our flat fee structure is fair and reasonable based on the amount of work involved. Keep More of Your Refund™
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.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. 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.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™
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