ERTC FAQs 2023
You’re navigating the Employee Retention Credit (ERC aka ERTC) labyrinth and it’s no easy task. Don’t worry, let’s break it down.
In this guide, we’ll answer your burning ERTC FAQs 2023. You’ll learn the what, why, and how of this tax credit, and even grasp the eligibility criteria.
So, as a business owner or startup, you’re not alone. We’re here to help you maximize your benefits from the ERC. Let’s conquer this together.
Q1 WHAT IS THE EMPLOYEE RETENTION TAX CREDIT?
In your journey to understand tax credits, you’ll find that the Employee Retention Tax Credit, also known as the ERC or ERTC, is a refundable employer tax credit established by the CARES Act to offset employment taxes during the COVID-19 pandemic. This tax credit was introduced as a stimulus measure to help companies, burdened by the economic consequences of the pandemic, to retain their employees.
What’s interesting about the ERC is its dual function. On one hand, it serves to mitigate the financial strain borne by employers, providing them with the necessary relief during these trying times. On the other, it’s aimed at preserving jobs, ensuring that employees continue to receive their wages even amidst economic turmoil.
But how does the ERC work? Essentially, it offsets the employment taxes that employers have to pay. If the credit exceeds the employer’s total tax bill, the IRS refunds the difference, making it a ‘refundable’ tax credit. This feature gives employers an incentive to retain their staff, even if business conditions are challenging.
Eligibility for the ERC depends on specific criteria. These include experiencing a significant decline in gross receipts or having operations fully or partially suspended due to government mandates. Interestingly, even new businesses and startups that commenced operations after February 15, 2020, may qualify. Nonprofits aren’t left out either, as they can also claim the ERC if they meet the IRS’s requirements.
The ERC, therefore, isn’t just a tax credit. It’s a lifeline for businesses navigating the stormy seas of the pandemic economy. It’s a bridge to better times, ensuring the continuity of jobs and companies alike.
Q2 ARE THE ERC & THE ERTC THE SAME THING?
Understanding the acronyms ERC and ERTC might seem confusing at first, but they’re actually referring to the same thing: the Employee Retention Credit. This credit is a federal provision designed to provide relief to businesses affected by the COVID-19 pandemic, helping to offset employment taxes and incentivize job retention.
The ERC and ERTC acronyms are used interchangeably in the financial world and both refer to the Employee Retention Credit established by the CARES Act. The act introduced this refundable tax credit to provide financial relief to businesses that retained their employees during the challenging economic climate caused by the pandemic.
These acronyms, ERC standing for Employee Retention Credit and ERTC for Employee Retention Tax Credit, represent the same tax benefit. It’s essential to understand this to avoid any confusion when researching or discussing this tax credit. Whether you come across ERC or ERTC in your reading or conversations, know they both point to the same important tool for business relief.
It’s also crucial to remember that while the IRS has temporarily paused processing new ERC claims due to scams and questionable claims, existing claims are still being processed. Businesses can submit claims through reputable ERC specialists if they meet the qualifications for this credit.
Q3 WHO QUALIFIES FOR THE EMPLOYEE RETENTION CREDIT?
You’re probably wondering if your business qualifies for the Employee Retention Credit (ERC). Qualification for this credit is based on specific criteria set by the CARES Act. Let’s delve into the details to help you understand the eligibility requirements and if your business makes the cut.
Firstly, one of the key requirements for qualifying is to have experienced a significant decline in gross receipts in 2020 and/or 2021. The IRS defines ‘significant’ as a 50% decrease in 2020 and a 20% decrease in 2021 when compared to the same quarter in the previous year. Even if your business has seen increased revenue, you may still qualify if you experienced a full or partial suspension due to a government mandate.
Operations being fully or partially suspended as a result of a government mandate is the second criterion for eligibility. For instance, if your business was ordered to close or reduce operating hours due to a Covid-19 related government order, this qualifies as a suspension.
But what if you’re a new business or startup that began operations after February 15, 2020? You’ll be pleased to know that you may also qualify for the ERC. Nonprofit organizations, including churches, are also eligible if they meet the IRS qualifications.
Q4 WHAT QUALIFIES AS A FULL OR PARTIAL SUSPENSION OF OPERATIONS?
Navigating the complexities of what constitutes a full or partial suspension of operations can seem daunting, but it’s essential to your eligibility for the ERC. A suspension refers to limiting commerce, travel, or group meetings due to COVID-19 under a governmental order. You must also demonstrate more than a nominal impact on your business as a result of these orders.
To qualify as a full or partial suspension of operations, your business must meet at least one of the following criteria:
- Gross receipts: The gross receipts for the suspended portion of the business must make up at least 10% of total gross receipts.
- Employee service hours: The employee hours for the suspended portion of the business must account for at least 10% of total service hours.
- Government order impact: Your business operations must have been affected by a federal, state, or local government mandate related to COVID-19.
Remember, these qualifications aren’t just theoretical. They affect your business’s eligibility for a potentially significant tax credit. Assessing whether your business qualifies can be complex, but it’s crucial to understand these rules to maximize your tax benefit.
In the challenging landscape of COVID-19, the ERC provides vital support for businesses. If your business meets these criteria for a full or partial suspension of operations, you could be eligible for this valuable tax credit. Take the time to understand these requirements—it could make a significant difference to your bottom line.
Q5 WHAT DOES A SIGNIFICANT DECLINE IN GROSS RECEIPTS MEAN?
After familiarizing yourself with the criteria for a full or partial suspension of operations, it’s time to delve into what constitutes a significant decline in gross receipts for your business. This is a critical eligibility requirement for claiming the Employee Retention Credit (ERC), and understanding it’s essential for maximizing your potential tax relief.
In 2020, a significant decline was defined as a 50% decrease in gross receipts compared to the same calendar quarter in 2019. So, if your gross receipts in the second quarter of 2019 were $200,000, and they fell to $100,000 or less in the second quarter of 2020, you’d have experienced a significant decline.
However, in 2021, the threshold for a significant decline was lowered. In this case, a 20% decrease compared to the same calendar quarter in 2019 was considered significant. Using the same example, if your gross receipts had dropped to $160,000 or less in the second quarter of 2021, you’d meet the criteria.
It’s important to note that these declines must be calculated on a quarterly basis. This means you can’t combine decreases across multiple quarters to meet the criteria.
Also, remember that gross receipts include all income received from all your activities, without subtracting any costs or expenses. This includes sales, services, interest, dividends, rents, royalties, and any other income.
Q6 DO NEW BUSINESSES OR STARTUPS QUALIFY FOR ERC?
If your venture is a new business or startup that began operations after February 15, 2020, you might be wondering about your eligibility for the Employee Retention Credit (ERC). Good news – you may qualify for this tax credit, provided you meet specific criteria.
To increase your understanding, let’s delve into the essential eligibility conditions:
- Employee Requirement: Your startup must have at least one qualifying employee. Unlike large-scale businesses, your startup can claim all wages paid to this employee for the ERC, regardless of whether they provided any services.
- Revenue Threshold: Your startup must have less than $1 million in revenue. This condition is meant to target relief towards smaller entities that may be facing more significant operational challenges due to the pandemic.
- Operations Commencement: Your business operations should have begun post-February 15, 2020. This stipulation is in place as the ERC is designed to offer relief during the COVID-19 pandemic.
Despite these requirements, it’s crucial to remember that the IRS has temporarily paused processing new ERC claims due to fraudulent activities. You can, however, submit your claim through a reputable ERC specialist, and it will be processed once the IRS resumes their activities.
Understanding these regulations is paramount to maximize your benefits from the ERC. As a startup, every bit of financial relief can be instrumental in weathering the storm and propelling your venture towards growth. Therefore, ensure you meet these conditions and claim your rightful ERC.
Q7 CAN NONPROFITS CLAIM THE ERC?
As a nonprofit organization, you’re probably wondering whether you can claim the Employee Retention Credit (ERC). The answer is yes – if you meet all the qualifications set by the IRS.
The ERC, established by the CARES Act, is a refundable employer tax credit, designed to offset employment taxes paid by employers during the COVID-19 pandemic. Its main aim is to preserve jobs and provide relief to businesses, including nonprofits.
To qualify for the ERC, your nonprofit must have faced a significant decline in gross receipts or had your operations fully or partially suspended due to government mandates. This decline in gross receipts is defined as a 50% decrease in 2020 and a 20% decrease in 2021. However, even if your nonprofit has seen increased revenue, you may still qualify for the ERC if your operations were interrupted by governmental orders.
It’s important to remember that the ERC is a refundable tax credit. This means if the credit exceeds your tax liability, your nonprofit could receive a refund. So, it’s worthwhile exploring this avenue of relief.
While the IRS has temporarily paused processing new ERC claims due to scams and questionable claims, existing claims are still being processed, and nonprofits can still submit claims.
Q8 DO I QUALIFY FOR ERC IF MY BUSINESS IS PERMANENTLY CLOSED?
You might be wondering whether your permanently closed business qualifies for the Employee Retention Credit (ERC). The answer largely depends on the timing of your business’s closure and whether you paid qualified wages during the eligible periods.
In order to be eligible for the ERC, your business should have been in operation during Q3 or Q4 of 2020, or during the first three quarters of 2021. If your business was permanently closed during these periods and you didn’t pay qualified wages, unfortunately, you won’t be eligible to claim the ERC.
Here are three key considerations:
- Timing of closure: If your business closed in 2020 or 2021, but you paid qualified wages during the eligible periods, you can claim the ERC.
- Payment of qualified wages: Even if your business was operating during the eligible periods but didn’t pay qualified wages, you won’t qualify for the ERC.
- Permanently closed: If your business is permanently closed and no longer paying qualified wages, you won’t be eligible for the ERC.
While the ERC is designed to help businesses retain employees during challenging times, it isn’t applicable to businesses that have permanently ceased operations and have stopped paying wages. Remember, the main purpose of the ERC is to encourage employers to keep their employees on the payroll during the periods of economic uncertainty caused by the COVID-19 pandemic.
It’s always wise to seek advice from a tax professional or a reputable ERC specialist to understand your eligibility better.
Q9 CAN I CLAIM ERC IF I SOLD MY BUSINESS?
One crucial question you might’ve thought is whether you’re eligible to claim the ERC if you’ve sold your business. The answer is yes, but with certain conditions. You must have been the owner of your business during any of the qualifying periods for claiming ERC. This means that you can’t claim the ERC for any period during which the business was under new ownership.
The IRS stipulates that for you to claim the ERC, your business must have experienced a significant decline in gross receipts or had its operations partially or fully suspended due to government mandates during the time you owned it. If your business fits these criteria, you’re eligible to retroactively claim your refund.
The ERC is a refundable tax credit, meaning if the credit exceeds your tax liability, you can receive a refund. So, even if you’ve sold your business, you can still benefit from this relief measure.
However, you must be meticulous in your claims. The IRS has temporarily paused processing new ERC claims due to scams and questionable claims. Therefore, if you decide to claim the ERC, it’s advisable to seek help from designated ERC tax credit companies. These companies are knowledgeable about the requirements and can guide you through the process, increasing the likelihood of your claim’s approval.
Q10 HOW ARE SMALL & LARGE BUSINESSES DEFINED FOR CLAIMING ERC?
While considering your eligibility for the ERC, it’s crucial to understand how the IRS defines small and large businesses, as this will influence the amount of tax credit you can claim. These definitions have changed over time, so make sure you’re using the correct ones for the relevant tax year.
In 2020, the IRS considered a small business to be any enterprise with 100 or fewer full-time employees. However, this definition expanded in 2021 to include businesses with up to 500 full-time employees. This extension aimed to provide more companies with the opportunity to claim the Employee Retention Credit during the ongoing pandemic.
- Small Business Definition: For the purposes of the ERC, a small business in 2020 was one with a maximum of 100 full-time employees. In 2021, this definition was broadened to include businesses with up to 500 full-time employees.
- Large Business Definition: A large business, in contrast, is one that exceeds the small business employee threshold for the relevant year. In 2020, this was any business with more than 100 employees. In 2021, it was any business employing more than 500 people.
- Wage Eligibility: The size of your business determines the wages you can claim for the ERC. Small businesses can claim all employee wages, while large businesses can only claim wages paid to employees not providing services.
Understanding these definitions and their implications can help you maximize your ERC claim and navigate the complexities of tax relief during these challenging times.
Q11 CAN I RECEIVE THE ERC IF MY BUSINESS’S REVENUE INCREASED?
Despite an increase in your business’s revenue, eligibility for the Employee Retention Credit (ERC) isn’t off the table if your operations underwent a full or partial suspension due to government mandates. This is the beauty of the ERC: it’s designed not just for businesses that saw a significant decline in gross receipts, but also those that were affected by pandemic-related prohibitions or restrictions imposed by a governmental authority.
Let’s dissect this a bit further. A full or partial suspension of operations could mean anything from a mandated closure to a significant reduction in business hours or a substantial impediment to normal operations. For instance, if a restaurant was forced to switch to take-out only service, that would qualify as a partial suspension.
Now, you might be wondering what constitutes a ‘governmental authority.’ This can be any local, state, or federal government entity that has jurisdiction over your business operations.
Interestingly, even a business that started after February 15, 2020, can qualify for the ERC, as the rules allow for such circumstances. So, don’t presume your increased revenue automatically disqualifies you.
However, it’s crucial to keep in mind that each claim for the ERC is subject to scrutiny by the IRS. To avoid any pitfalls, consider seeking help from a reputable ERC Tax Expert who can guide you through the process and maximize your chances of successfully claiming the credit. Remember, the ERC is a refundable tax credit, which means even if the credit exceeds your tax liability, you can still get a refund.
Q12 WHAT TYPES OF BUSINESSES CAN RECEIVE THE EMPLOYEE RETENTION TAX CREDIT?
Understanding which types of businesses can receive the Employee Retention Tax Credit (ERTC) can be crucial to your financial strategy during these trying times. It’s worth noting that an array of businesses, if they meet the IRS requirements, can leverage the ERTC. This includes for-profit businesses, nonprofit organizations, and even churches or religious organizations.
The IRS has set certain criteria that businesses must meet to qualify for the ERTC. Here are three key types of businesses that qualify:
- For-profit Businesses: As long as your business has suffered a substantial dip in gross receipts or had operations fully or partially suspended due to government mandates, you’re eligible for the ERTC. The decline in gross receipts is defined as a 50% decrease in 2020 and a 20% decrease in 2021.
- Nonprofit Organizations: Nonprofits, including churches, can claim the ERTC too. The same requirements as for-profit businesses apply. They must experience a significant decline in gross receipts or forced operational suspensions.
- Startups: New businesses that commenced operations after February 15, 2020, may also qualify for the ERTC. This is to support these businesses during their crucial initial stages.
However, it’s essential to remember that some businesses, such as government entities and self-employed individuals with no employees, don’t qualify for the ERTC. Your understanding of these eligibility requirements can help you take full advantage of the tax credits available to you and can significantly impact your business’s financial well-being.
Conclusion
Navigating the ERC doesn’t have to be daunting. Understanding its background, purpose, eligibility, and calculations empowers you to maximize its benefits.
Whether you’re a small business, nonprofit, or startup, the ERC could be a crucial lifeline in weathering the financial challenges of the pandemic.
Remember, every business’s situation is unique, so ensure you’re fully informed and consider seeking expert ERTC advice to get the most from the ERC.
Your business’s resilience matters.
