You’re a savvy business owner, always on the lookout for ways to support your team. So you’ve likely heard about the Employee Retention Credit (ERC aka ERTC). But you’re wondering, how many employees do you need to qualify for ERC?
Don’t worry, we’ve got you covered. We’re about to break down the nitty-gritty of ERC qualifications, including the employee count.
Together, let’s uncover the benefits that ERC could bring to your business.
The ERC Tax Credit Qualification Rules
You’ll need to understand the qualification rules for the Employee Retention Credit (ERC) tax credit, which hinge on specific requirements related to your organization’s gross receipts and potential suspension of business operations.
The IRS stipulates that to qualify, your organization must have experienced a significant decline in gross receipts for each quarter in 2020 and 2021 compared to pre-COVID (2019) gross receipts. The degree of reduction that renders you eligible differs between 2020 and 2021. In 2020, you qualify if your income was at least 50% less than in 2019; while in 2021, this threshold was decreased to 20% less than in 2019.
Alternatively, if your business operations were partially or fully suspended by a government authority at any point in 2020 or 2021, you likely qualify for the ERC. The inability to conduct business due to restrictions on travel, commerce, or meetings can be considered a form of suspension.
It’s also essential to note that you must have operated your business or carried out a trade before February 16, 2020, to be eligible for the ERC. The size of your organization, whether a business or nonprofit, doesn’t exclude you from eligibility. However, rules vary regarding which wages can count towards the ERC calculation between large and small organizations.
Understanding these rules is crucial to ensuring you correctly apply for and receive the ERC tax credit, thereby supporting your employees and your organization during these challenging times.
There are two broad ways to qualify for the ERC. Each qualification comes with its own rules that can be complex to interpret, so we’ll start with a simple overview.
To qualify for the Employee Retention Credit (ERC), you need to understand the two main avenues of qualification. Each pathway has unique requirements, often hinging on the number of employees within your organization.
Let’s simplify and break down these complex rules, starting with the employee count criteria.
Number of Employees
Understanding the number of employees needed for ERC qualification, both in terms of minimum and maximum, is crucial for your business.
For 2020, the ERC applies to businesses with 100 or fewer full-time employees.
In 2021, this limit is increased to 500. However, even larger businesses can qualify by counting full-time equivalent employees.
Here are key points to remember:
- Small employers in 2020 are those with 100 or fewer full-time employees.
- In 2021, small employers could have up to 500 full-time employees.
- Full-time equivalent (FTE) employees can be considered in businesses with over 500 employees.
- At least one person, besides yourself, must be employed during the qualifying period.
If you are uncertain or confused consulting with ERTC tax professionals can help ensure you meet these requirements.
What Repeal of the ERC Means to Your Business
The repeal of the Employee Retention Credit (ERC) could have significant implications for your business. If you’ve received advance payments or reduced employment tax deposits in anticipation of the ERC, it’s important to understand how these changes impact your financial position.
Additionally, if you’re a recovery startup, the repeal may alter the financial assistance you were expecting.
If You Received Advance Payments
In light of the repeal of the ERC, if you’ve received advance payments, you’ll need to understand the implications for your business. According to IRS guidelines, businesses that got advanced payments for Q4 2021, but didn’t qualify as recovery startup businesses, can avoid penalties if they repay these advances by the due date of their employment tax return.
- Repay advance payments by the due date to avoid ‘failure to pay’ penalties.
- Non-qualified recovery startup businesses are required to repay advances.
- The failure to repay might result in penalties.
- The repeal of the ERC impacts businesses that received advance payments.
Understanding these points will help you navigate the repeal of the ERC and its impacts on your business.
If You Reduced Employment Tax Deposits
If you’ve reduced your employment tax deposits in anticipation of the ERC, it’s crucial to know what the repeal of this credit means for your business.
If you reduced deposits on or before Dec. 20, 2021, and aren’t a recovery startup business, you won’t face a ‘failure to deposit’ penalty if you meet certain criteria.
You must have reduced deposits based on rules in Notice 2021-24, deposit the retained amount by the due date for wages paid on Dec. 31, 2021, and report the tax liability resulting from the termination of your ERC on the relevant tax return or schedule.
It’s essential to refer to the employment tax return instructions for more information on reporting tax liability.
If You Were a Recovery Startup
As a recovery startup, you’ll need to understand what the repeal of the Employee Retention Credit (ERC) means for your business. The ERC has been a significant financial lifeline, aimed at helping businesses retain employees during the challenging economic conditions brought by the COVID-19 pandemic.
However, with its repeal, there are some crucial points to consider:
- The elimination of the ERC means you’ll no longer receive tax credits for retaining employees.
- This could potentially increase your operating costs, especially if you were heavily reliant on this credit.
- You might need to reconsider your budgeting and financial planning strategies.
- It’s essential to seek professional financial advice to navigate these changes and explore other available financial relief options.
Conclusion
In conclusion, understanding the ERC qualification rules is crucial for your business. Whether you’re a small entity or a large one, this credit can offer substantial benefits.
Stay informed about the changes and navigate these complex regulations to maximize your benefits. Remember, the goal is to retain your hardworking team during these challenging times.
Don’t miss out on this opportunity to offset costs through the ERC.
