In this blog post, we will give an overview of what is ERC, how it works, and why it is a valuable incentive for small and medium-sized businesses.
As businesses strive to navigate the challenges posed by the COVID-19 pandemic, governments worldwide have implemented various measures to support struggling industries. One such initiative in the United States is the Employment Retention Credit or employment retention tax credit.
In this article, we will explore the broad view and significance of the Employment Retention Credit, its eligibility criteria, and its benefits to businesses during those unprecedented times.
If your business was in operation before February 15th, 2020 and you had W-2 employees on the books during 2020 and 2021 you might be eligible and can still claim this ERTC refund.
What is Employment Retention Credit?
The Employment Retention Credit is a refundable tax credit introduced by the United States government as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. Its primary aim is to provide financial relief to businesses impacted by the pandemic, encouraging them to retain their employees by offsetting a portion of their payroll expenses.
Employee Retention Credit Eligibility
To qualify for the ERC, businesses must meet specific criteria
The ERTC tax credit is available to businesses in a variety of sizes, tax-exempt organizations included. However, state and local governments and their instrumentalities do not qualify.
Both for-profit and nonprofit entities may qualify for this credit. If your businesses have been in operation before February 15th, 2020, you qualify to claim a refund.
The good news is that filing can still be done retroactively both for 3 quarters of 2020 and three quarters of 2021. Barring any possible changes by Congress or the IRS the deadline for 2020 is in April 2024 and for 2021 the deadline is April 2025.
Unfortunately, this credit does not apply if you are a sole proprietor or anybody paying contractors or 1099’s.
ERC Rules
ERC Rules 2021 Compared to ERC Rules 2020
When comparing the employee retention tax credit eligibility between 2020 and 2021, there are several notable differences.
In 2021, a higher maximum credit of $7,000 per quarter can be claimed for each eligible employee by eligible employers. This represents an increase from the maximum credit of $5,000 available in 2020.
The employee retention credit calculation method for the credit has also changed
In 2021, the ERC credit is calculated at 70% of qualified wages paid, compared to 50% in 2020.
However, the maximum amount of qualified wages remains the same at $10,000 per eligible employee, per quarter.
Another key difference is the employee retention credit eligibility criteria
For Eligible Employers with fewer than 500 average full-time employees in 2019, the credit applicable to 2021 is available to all employees receiving wages. This is a change from 2020, where the credit was available for Eligible Employers with fewer than 100 average full-time employees in 2019.
These differences highlight the increased benefits and broader eligibility for the employee retention tax credit 2021 compared to 2020.
If you were a recipient of a PPP loan you are also eligible to qualify for the ERCT Tax credit retroactively.
2022 ERC Requirements
To be eligible, businesses must retain employees and continue paying wages during the period they claim the credit. ERC can be claimed for both full-time and part-time employees, subject to certain limitations. As mentioned before you can claim until April 2025 regarding 2021 and April 2024 regarding 2020.
To claim the credit, businesses must demonstrate either of the following:
a. Partial or full suspension of operations:
The business was fully or partially suspended due to governmental orders which consequently limited commerce, travel, or group gatherings during the pandemic.
b. Significant decline in gross receipts:
The business experienced a significant decline in gross receipts. For 2020, this means a 50% decline compared to the same quarter in 2019. For 2021, the threshold is reduced to a 20% decline.
The Employment Retention Credit offers several benefits to eligible businesses, including:
ERC Credit Qualifications 2021 and 2020
The ERC provides a significant tax credit that can help businesses offset a portion of their payroll expenses, reducing the overall financial burden during challenging times. This can free up resources for other critical business needs or potential expansion.
A business could be able to claim back up to $26,000 per W-2 employee.
ERC IRS Application Can Help With Cash Flow Management
Please note that because this is seen as an income by the IRS, tax will have to be paid on the amount refunded – certain rules apply and each employer must make sure what ERC rules are applicable to them.
By incentivizing businesses to retain their employees, the ERC helps protect jobs and preserve the expertise and skills within organizations.
The ERC is a refundable tax credit, meaning that businesses can receive the credit even if it exceeds their total tax liability. This can provide a much-needed infusion of cash flow, allowing businesses to meet their operational expenses and obligations more effectively.
Conclusion to What is ERC?
The Employment Retention Credit has emerged as a vital lifeline for businesses navigating the economic challenges brought on by the COVID-19 pandemic. By providing financial relief the ERC program plays a crucial role in supporting businesses and preserving jobs. It is essential for eligible businesses to understand the requirements and benefits of the ERTC grant to take full advantage of this valuable program.
