The COVID-19 pandemic has had a severe impact on businesses of all sizes, forcing many to lay off or furlough employees. To provide relief to struggling businesses, the government introduced the Employee Retention Credit (ERC aka ERTC).
This tax credit is designed to help employers keep their employees on payroll and avoid layoffs during these challenging times. While ERC is easier to access than loans and grants, calculating the credit can be confusing for businesses.
In this article, we will explore the formula for determining the employee retention credit which involves several factors such as eligibility criteria, maximum credit amount, qualified wages, reduction in gross receipts, and advance payments.
If this process seems complicated and you are unsure of how to proceed we would recommend you contact an ERTC tax expert for advice and guidance. They can help calculate ERC accurately and claim it effectively.
Eligibility Criteria
So, you’re wondering if your business is eligible for the employee retention credit? Well, let’s dive into the eligibility criteria.
The ERC program has different eligibility criteria for 2020 and 2021. For 2020, businesses that saw a decline of up to 50% in gross receipts for any quarter compared to the same period in 2019 are eligible. In contrast, for 2021, any business that suffered economic hardship due to COVID-19 and subsequent government orders limiting economic activity in one or more quarters becomes eligible.
To be eligible for ERC, businesses must also have maintained an average FTE count of fewer than 500 employees during any calendar quarter affected by COVID-19. Additionally, businesses can only claim ERC on qualified wages paid between March 12, 2020, and December 31, 2021.
Qualified wages include compensation paid to full-time employees up to $10,000 per quarter. Furthermore, certain types of employers are ineligible for ERC benefits. These include state and local governments and their instrumentalities; small tax-exempt organizations; self-employed individuals; household employers; railroad retirement board employers; and entities affiliated with members of Congress or heads of executive departments.
Maximum Credit Amount
The maximum amount of credit that eligible businesses can receive through ERC in 2021 is up to $28,000 per year and $10,000 per quarter. This means that businesses can claim a credit of up to $7,000 per employee each quarter, depending on the number of qualified wages paid during the period.
The credit reduces employer social security taxes and offers refundable tax relief for businesses affected by COVID-19. To calculate the maximum credit amount for each quarter, eligible employers need to determine their total qualified wages paid during that period.
Qualified wages include full-time workers’ compensation and pay and are subject to certain limitations based on an employee’s average wage level. Businesses should also subtract any other payroll tax credits received during the same period from their ERC claim before submitting it.
It’s essential to note that businesses cannot claim both a PPP loan and an ERC for the same wages or expenses. However, they may be able to use both programs if they apply them separately for different periods or expenses.
Overall, ERC is a valuable program that provides much-needed cash flow for small businesses affected by COVID-19 while reducing their payroll tax liabilities.
Qualified Wages
You’ll be pleased to know that the qualified wages for ERC include not only salary but also benefits such as health insurance, retirement contributions, and paid time off. In fact, the IRS considers any form of compensation paid to an eligible employee during the period of economic hardship as a qualified wage. This means that businesses can claim ERC on more than just salaries.
The definition of qualified wages varies depending on whether a business is using 2020 or 2021 eligibility criteria:
For 2020, qualified wages are limited to $10,000 per employee per year and include compensation paid between March 13 and December 31 of 2020.
However, for 2021, qualified wages have expanded to $10,000 per quarter with a maximum credit amount of $28,000 per employee in total.
It’s important to note that certain types of employees may not be considered eligible under the ERC program. These include family members of business owners or those who own more than 50% interest in the company.
It’s crucial for businesses to understand what constitutes a qualified wage and ensure they are claiming ERC accurately to receive maximum benefit from this valuable program.
Reduction in Gross Receipts
Businesses can become eligible for the Employee Retention Credit program if they’ve experienced a significant decline in gross receipts due to the COVID-19 pandemic. A significant decline in gross receipts denotes a severe drop in gross revenues in the first calendar quarter of 2020 of more than 50% of what they were in the previous calendar quarter. This is one way businesses can qualify for ERC and get financial relief.
The reduction in gross receipts eligibility rule applies to both 2020 and 2021. For businesses that didn’t exist before Q1 of 2019, the comparison will be between their Q2 2019 results and their corresponding quarters in 2020, respectively.
To apply, qualifying employers must provide proof that their business was affected by government orders or economic hardship caused by COVID-19. Overall, meeting the reduction in gross receipts threshold is essential for businesses seeking to claim the credit successfully.
You may wish to consult with ERTC tax experts on calculating qualified wages and documenting proof of eligibility accurately. The ERC program provides valuable assistance for businesses affected by COVID-19, enabling them to stay afloat during these challenging times.
Advance Payments
By applying for advance payments, eligible employers can receive cash flow assistance from the Employee Retention Credit program to help support their business operations.
Advance payments are available for small businesses that expect to be eligible for the ERC in 2021 but haven’t claimed it yet. The program allows businesses to request an advance of up to 70% of their estimated credit amount.
To qualify for advance payments, businesses must meet certain requirements, including a decrease in gross receipts by at least 20% compared to the same quarter in 2019. They also need to have fewer than 500 employees and be able to show how they plan on using the funds received. Advance payments can only be used towards qualified wages and health plan expenses.
Businesses that apply for advance payments will still need to calculate their actual ERC at the end of each quarter and reconcile any differences between the estimated amount and actual amount received. If a business overestimates its credit amount, it may need to repay some or all of the advanced payment back.
Overall, advance payments offer an opportunity for eligible employers to access financial assistance through the Employee Retention Credit program. However, it’s important that businesses understand eligibility requirements and properly estimate their credit amounts before requesting an advanced payment.
ERC vs PPP Loans
Don’t miss out on the important differences between ERC and PPP loans, which could be the key to your small business’s survival during these uncertain times.
While both programs were designed to provide assistance to businesses affected by COVID-19, they differ in several critical ways.
Firstly, PPP loans are forgivable only if a business uses at least 60% of the loan amount for payroll expenses. Note the PPP closed for new business on May 31st, 2021.
In contrast, ERC is a tax credit that businesses can claim against their employment taxes. They can use this credit for any business expense and even receive cash refunds if they have excess credits.
Secondly, businesses could have applied for PPP and are now looking to apply for ERTC but cannot use them for the same expenses. For example, wages paid with PPP funds cannot be used as qualified wages for ERC calculations.
Consulting with Experts
If you’re feeling overwhelmed by the complexities of ERC and PPP loans we would recommend you seek advice from ERTC tax experts who can guide you through the process. Consulting with professionals who understand the nuances of these programs can help you maximize your benefits while avoiding costly mistakes.
Here are five things to keep in mind when looking for an expert to assist you with ERC:
- Look for a professional with experience in ERTC tax law and accounting. A qualified expert should be able to provide guidance on how to calculate your credit accurately while complying with IRS rules.
- Find someone who understands your industry. Different sectors have unique challenges that affect eligibility and qualification for ERC.
- Choose someone who has access to up-to-date information on ERC guidelines. The rules surrounding this program are continually changing as new legislation gets passed or updated.
- Check references and reviews before hiring an expert.
- Consider their fees carefully before signing any contract.
Consulting with experts can save you time, money, and headaches when navigating the intricacies of employee retention credit programs like ERC. With careful consideration of qualifications and fees charged by providers, small businesses can get the support they need without breaking their budget or risking compliance issues down the road.
Conclusion
In conclusion, the Employee Retention Credit (ERC) is a valuable tax credit designed to provide relief to small businesses affected by the COVID-19 pandemic.
The eligibility criteria for ERC include a reduction in gross receipts or a full or partial suspension of business operations due to government orders. Businesses can claim up to $7,000 per employee per quarter as an ERC against their share of Social Security taxes.
Qualified wages include wages paid between March 13th and December 31st, 2020, and January 1st and June 30th, 2021. Advanced payments are available for eligible employers who have reduced payroll tax deposits.
It’s important to note that businesses cannot claim both PPP loans and ERCs for the same wages. Overall, understanding these formulas is crucial in claiming the employee retention credit effectively.
