ERC
The Employee Retention Credit (ERC) is a retroactive tax credit that rewards businesses for keeping at least 2 employees on payroll through 2020 and 2021. This government funded program was passed through the CARES Act. It’s a cash refund on taxes you already paid.
The average ERC per employee is $26,000.
What Is The Employee Retention Tax Credit (ERTC)?
Did your small business keep employees on your payroll through the pandemic? Congratulations! You may be eligible for a tax credit from the Internal Revenue Service, too.
The Employee Retention Credit, or ERTC or ERC, was first launched in the early days of the COVID-19 pandemic as part of the CARES Act relief package. It was intended as an extra incentive for smaller businesses to retain their employees, although it was widely overshadowed by the Payment Protection Program.
However, the ERTC is still available retroactively for both 2020 and 2021. Importantly, small businesses that received PPP loans are eligible to take the ERTC, too.
ERTC is a credit, i.e., free money off your tax bill. Remember that unlike a deductible, which decreases a business’ taxable income, a credit reduces the amount of total tax owed to the IRS.
Want to know if you qualify? Click here.
What Is The Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit intended to encourage businesses to continue to pay employees throughout government shutdowns during the Covid-19 pandemic.
CARES Act – 2020
The Employee Retention Credit was first introduced as part of the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) in 2020. The act permitted qualifying businesses to claim 50% of qualifying wages up to $10,000 per employee paid from March 13 through Dec. 31.
Consolidated Appropriations Act – 2021
The Employee Retention Credit was updated in 2021 to allow qualifying employers to claim 70% of qualifying wages up to $10,000 per quarter in 2021.
American Rescue Plan Act – 2021
This act added recovery startup businesses who started their business on or after Feb. 15, 2020, as eligible businesses if their annual gross receipts didn’t exceed $1 million in 2020 or 2021 and they had more than one or more W-2 employees excluding family members.
Infrastructure Investment And Jobs Act – 2021
Terminates the ERC credit for the 4th quarter of 2021 except for recovery startup businesses.
How The ERTC Works
The Employee Retention Credit is a refundable tax credit for qualifying employee wages. The credit is based on payroll taxes rather than income taxes, so you can still receive the credit even if you paid no income taxes in 2020 or 2021.
The best part is because it is refundable, it’s possible to receive money back beyond what you originally paid in payroll taxes. So if you qualify for $50,000 under the ERC, but only paid $10,000 in payroll taxes, you would still receive the full $50,000 refund from the IRS. Bear in mind there is a small non refundable portion of the ERC that is limited to the amount you actually paid in employee Social Security and Medicare taxes.
How Much Money Will My Business Get From The ERTC?
For tax year 2020, eligible small businesses can claim 50% of the first $10,000 in wages per employee through the Employee Retention Credit. This adds up to a maximum of $5,000 per worker, and you can apply for this credit now in 2022.
For the first 3 quarters of 2021, eligible small businesses can claim up to 70% of the first $10,000 in wages per quarter for each employee. This amounts to $21,000 per employee.
Year
Max per employee
How the ERC is calculated
2020
up to $5,000 per employee
50% of first $10,000 in wages per employee
2021
up to $21,000 per employee
70% of first $10,000 in wages per employee (quarters 1, 2, 3)
Total
up to $26,000 per employee
In total, a small business could potentially receive $26,000 in credits per employee kept employed through 2020 and 2021. Keep in mind that the IRS defines certain health care expenses as part of an employee’s wages.
IS MY SMALL BUSINESS ELIGIBLE FOR THE ERTC?
While businesses of all sizes can benefit from ERC, the program favors small businesses over larger employers.
You can find out here if you qualify for the ERC and the fastest way to claim your credit.
Number Of Full-Time Employees
For tax year 2020, a small business is defined as a business that averaged 100 or fewer full-time monthly employees in 2019. For tax year 2021, the definition is expanded to include businesses that averaged 500 or fewer full-time monthly employees in 2019.
Larger employers can claim the ERC but only for wages paid to employees not to work or for some qualified health costs.
For small businesses, you can claim the credit for all employees whether they worked or not.
Revenue Impact Or Full Or Partial Suspension
Now, to be eligible for the ERC, your business must have been rocked by either a government-mandated lockdown or a plunge in revenue.
If your business was impacted by a full or partial suspension of operations because of a government COVID-19 order during any quarter, you can qualify. This includes restrictions on hours or capacity.
Your business can also qualify if it experienced a “significant decline” in gross receipts as defined by the IRS. For tax year 2020, a significant decline means gross receipts for a quarter are less than 50% compared to the same period in 2019. For the first 3 quarters in 2021, it means quarterly gross receipts are less than 80% compared to the same period in 2019.
For the first 3 quarters of 2021, if your business did not see a 20% decline in gross receipts compared to 2019, businesses can also elect to use the immediately preceding quarter for comparison. This means that if a business’s Q2 of 2021 isn’t eligible compared to Q2 of 2019, they can instead use Q1 of 2021 and compare it to Q1 of 2019 to meet eligibility.
Recovery Startup Business
If you have a newer business, the ERC was amended in 2021 by The American Rescue Plan to even let you gain access. So-called “recovery startup businesses” can apply for the credit for Q3 and Q4 of 2021. Recovery startup businesses are defined as ones that opened after February 15, 2020, and have annual gross receipts under $1 million. As long as you meet these two criteria and have one or more W2 employees, you don’t have to meet the other eligibility requirements. The maximum a recovery startup business can receive is $50,000 in ERC per quarter.
Do You Qualify For An Employee Retention Tax Credit?
- Number of employees
- Tax year 2020: 100 or fewer employees
- Tax year 2021: Fewer than 500 employees
- Recovery startup business
- Opened after February 15, 2020
- Annual gross receipts under $1 million
- Have one or more W2 employees
- Meet one of the following conditions
- Reduced revenue in 2020 or 2021 resulting from government mandates
- Drop in revenue
- Tax year 2020: less than 50% of 2019 receipts
- Tax year 2021: less than 80% of 2019 receipts
- Meet one of the following conditions
How Do I Receive My Employee Retention Credit?
It’s easy!
Step 1: Visit Nagel & Associates. (You’re already here, good job!)
Step 2: Confirm your eligibility. Use our pre-qualification survey to see if you qualify and to calculate your estimated tax credit.
Step 3: Get your 941 income tax returns together or sign IRS Power of Attorney so we can pull your IRS transcripts and start the application. We’ll need a few details from you about the dates you’re applying for and the income earned in 2020 and 2021.
Step 4: Sign a few docs, upload your ID info, and select your payment options.
Step 5: Nagel & Associates will e-file for your credit directly to the IRS. Our streamlined process does the heavy lifting for you so just sit back and relax! Normal processing time is 8-16 weeks.
CLICK HERE TO CHECK YOUR ELIGIBILITY
How will I receive my COVID-19 ERC credit?
The IRS will deduct your credit from any outstanding tax liabilities you owe. If you don’t owe the IRS anything, the way you’ll receive your tax credits depends on your qualifying dates:
For 2020 Credits
the IRS will issue you a check, sent directly to your mailing address
For 2021 Credits
you can receive either a check or direct deposit to a checking or saving acount
Due to a lack of awareness and the program’s complexity, we believe millions of small businesses missed out on filing for these valuable tax credits in 2020 and 2021. As a CPA firm we have used our experience to recoup COVID-relief funds for thousands of small businesses and individuals.