Does Your Business Qualify for a Retro Tax Credit on Wages Paid in 2020 & 2021?
Many businesses were negatively impacted by the Coronavirus pandemic. The U.S. unemployment rate rose as high as 14.7% in April 2020. Businesses experienced supply chain problems and inflation. To prevent economic collapse, the U.S. Government and the Federal Reserve implemented several stimulus measures such as interest rate cuts, loans, asset purchases and changes in regulations to incentivize businesses to keep their operations running and their people employed.
While many of those programs have ended, one program, the Employee Retention Credit, implemented under the CARES Act is still available for businesses to seek tax relief.
When does the ERC program end?
As part of the recently signed Infrastructure Investment and Jobs Act, the Employee Retention Credit (ERC) program retroactively ended on Sept. 30, 2021, for most businesses. However, businesses may be able to retroactively claim the ERC and have up to three years from the original due date for filing of your payroll tax returns to determine if wages they paid after March 12, 2020 through the end of the program are eligible.
What are the financial benefits of the ERC to my business?
During 2021 an eligible employer may claim a maximum of $7,000 per quarter for each qualifying employee. You may be able to claim $28,000 per employee.
Refund amounts in 2020 were 50% of your first $10,000 in wages, or a maximum of $5,000 per quarter per employee.
Additionally, the ERC is not a loan. It is a completely refundable credit. If the ERC benefit is higher than the amount of payroll taxes you paid, you receive a refund of the difference. That’s right. You would not only receive the amount you already paid but also receive a check for the excess credit amount.
Does the retroactive ERC program end date apply to Recovery Startup Businesses?
No. Recovery Startup Business’ remained eligible to pay qualified wages through Dec. 31, 2021, to claim the credit. and;
Eligible Recovery Start Up business’ may also be able to retroactively claim the ERC for Q3 and Q4 of 2021, if the business:
- Started operations after February 15, 2020
- Had an average of $1 million or less in gross receipts.
How is Eligibility Determined?
Employer eligibility is determined based on whether you:
- Actively engaged in a trade or business during the calendar year of 2020 or 2021 and
- Have experienced a partial or total government-ordered shutdown during the calendar quarter due to COVID- OR
- Have experienced a gross receipts decline above 20% in 2021 or 50% in 2020
Wages eligible include all wages and health insurance benefits paid to an employee during the appropriate eligibility period. The Cares Act excludes:
- Wages that were included as part of the credit for paid family and medical leave
- Wages paid to related individuals
- Wages that the employer received a tax credit for under the Families First Coronavirus Response Act
- Wages paid to employees under the Work Opportunity Tax Credit
- Wages the employer receive a tax credit for under the Indian Employment Credit
For the ERC, there is no size limit for the ERC on eligibility for the ERC.
- For employers with 100 full-time employees or less, all employee wages qualify for the credit. It does not matter whether the employer is open for business or shutdown.
For employers with more than 100 full-time employees, the business’ qualified wages are those wages paid to employees when the business is not providing services due to COVID-19-related circumstances. In 2021, that number was changed to 500 full-time employees.
Won’t my current Payroll company file for the ERC for my business?
Your payroll company handles the time calculations and basics of payroll taxes. Their focus is to keep your business compliant for everyday operations. The ERC is not a normal part of operations for businesses or payroll companies. The ERC is a tax credit taken against the employer’s share of social security taxes in 2020 or Medicare in 2021. The calculations for figuring out the eligible wages can be complex. especially if you want to maximize that amount. While the payroll company will have the information you need to run the calculations, most are not set up to handle the ERC process.
Amended Payroll tax returns can be filed up to three years from the original filing date.
How can I apply for the ERC?
You don’t need to fill out an application for the ERC. The ERC is a tax credit you can claim if your business is eligible. The credit reduces your deposits for federal employment taxes in relation to the anticipated ERC amount.
Don’t Take a Chance on Missing out on the Benefits of the ERC!
Analyzing and calculating the Employee Retention Credit is complicated and time-consuming. Since The CARES Act § 2301 of 2020 established the ERC, there have been numerous legislative changes to the program. The IRS has hundreds of pages of ERC rules. Additionally, mistakes in filing the ERC could lead to costly IRS audits, accrual of interest, and penalties.