Everyone, from the wealthy to the poor, feels the effects of economic instability. Because of the unpredictability of the market, several companies have had to lay off employees. Companies experience further revenue losses as a result of the reductions in spending made necessary by the loss of income for their employees. This is why the ERC credits were developed; they would have been useless during the COVID-19 pandemic when many firms were forced to close.
Employee Retention Credit
The Employee Retention Credit (ERC) was established to help small firms that had suffered greatly from the initial shutdowns and suspensions brought on by the pandemic. The credit can be used to offset payroll tax liabilities.
Companies can claim the ERC credit immediately, without waiting to file their payroll tax return. In this way, they can get their hands on the money right away by having their paycheck deposits lowered. The Internal Revenue Service offers the option of requesting an advance payment. The nice part is that ERC credits are not refundable.
Even though the ERC technically ended in 2021, many businesses can still submit claims for the credit in a retroactive fashion. In most cases, a company has three years from the date it files its return (or two years from the date it pays its taxes) to make any necessary adjustments. Simple Form 941X amendments to previously filed payroll tax returns are all that is required to claim the credit for your company.
After the IRS processes the updated return, a refund check will be mailed to the address listed.
Read on if you’re curious about the Employee Retention Credit and whether or not you might be eligible for it.
The Employee Retention Credit: An Overview
As part of the CARES Act of 2020, the United States Congress established the Employee Retention Credit. The original tax credit was set to expire in 2016, but it was extended and revised numerous times before finally being phased out at the end of 2021. The ERC is not a loan like many other pandemic aid programs, so recipients do not have to worry about paying it back.
The following are examples of how ERC Credits helped qualifying businesses:
ERC in 2020
Each employee is eligible for a maximum tax credit of $5,000, which is equal to 50% of their qualified wages paid (up to $10,000 in wages).
ERC in 2021
70% of each employee’s first, second, and third quarter eligible salaries paid (up to $10,000 per employee). The maximum annual credit per worker is $21,000.
Following this, we will discuss what kinds of earnings are regarded as “qualifying” for the purposes of the ERC and how an employer can become eligible for it. Below, we will also provide examples of how to compute ERC credits.
How much do ERC-qualified wages start at?
If we say that an employee’s income or pay for a certain quarter count toward their threshold, we mean that they do. The cost of employee health benefits is included as well.
How to Determine Your ERC
Looking at an example like the one below is the quickest and most accurate approach to learning how to determine your ERC:
Andy’s Hair Cutters, for instance, employs five people who collectively make about $40,000 per year. In 2020 and the first three quarters of 2021, the company met the requirements to join the ERC.
Andy pays his staff a total of $50,000 per quarter or $10,000 per person. Andy’s tax credit for 2020 is determined by the fact that the ERC will pay half of his income.
$50,000 x50% = $25,000
Don’t forget that in 2020, Andy’s annual salary from the ERC was a mere $5,000. This meant that in 2020 Andy could only seek a maximum of $25,000.
The ERC had reached 70% of the quarterly paid page count for 2021. When compared to what they may legally assert in 2020, this is a significant increase.
The ERC for the year 2021 would be:
$50,000 x 70% = $35,000
$35,000 x 3 = $105,000
These results demonstrate the ERC’s potential usefulness for eligible businesses.
Can You Take Advantage of the Credit for Keeping Good Employees?
If your company or nonprofit wants to use the ERC, it must meet one of the following criteria during the quarter in question.
• If the government ordered you to close down your business or reduce your hours because of the Covivirus 19 outbreak, or
• If your business had a large drop in revenue, you may be eligible for compensation.
It is important to note that the definition of “substantial drop in gross receipts” in the calendar years 2020 and 2021 is very different from one another.
Your company’s quarterly gross receipts for 2020 should have dropped by at least 50% from the same period in 2019. You can’t have more than 100 full-time workers in your company (excluding the proprietors, of course).
Your company’s quarterly gross receipts for 2021 should have dropped by at least 20% from the corresponding period in 2019. You need between one and five hundred W-2 employees (excluding owners) to qualify.
The ERC considers a worker to be full-time if they put in at least 30 hours per week or 130 hours per month.
For any quarter in which they don’t have numbers, new enterprises (those created after 2019) can use their first full quarter of operations’ gross receipts as a benchmark.
How Do Organizations Apply for ERC Credits?
When comparing the ERC to other tax credits available to small business owners, it quickly becomes clear that it is not sufficient to cover the cost of income taxation. What it actually accomplishes is lowering the amount of Social Security tax paid by the company.
The credit can be claimed in one of two ways by taxpayers:
1. Reduce payroll tax payments by the anticipated credit. Filing Form 7200 allows taxpayers to request an advance payment of their anticipated tax credit if it is more than the number of their payroll payments.
2. You can get a refund of your tax deposits by filing a claim for the ERC on Form 941, Employer’s Quarterly Federal Tax Return.
In order to apply for the ERC after its formal conclusion at the end of 2021, business owners must file a Form 941X amendment for a prior quarter in which they were eligible for the payroll tax credit but did not actually claim it.