The Importance of Knowing the ERC and What it Means for Business Owners
With the tax filing deadline fast approaching, it pays to ensure your company is getting all the assistance available. One government program that has come to the rescue of businesses and tax-exempt entities is the Employee Retention Credit (ERC).
If ERC sounds like a foreign language to you, this article will summarize the importance of knowing the tax policy, what it means for your business, and how you can maximize the opportunity.
Ready to get those sweet, sweet refunds? Let’s dive right in!
What is Employee Retention Credit?
The ERC is a fully refundable tax credit for employers who keep paying employees despite revenue declines or temporary business closures due to COVID-19.
ERC was a provision of the CARES Act that was passed on March 27, 2020 as a relief measure for businesses to encourage them to keep employees on their payroll.
The tax credit became effective from March 2020 through to January 31, 2021.
The ERC legislation was extended to December 2020 by the Consolidated Appropriations Act 2021 (CAA) and then to December 31, 2021 by the American Rescue Plan Act 2021 (ARPA).
How is the ERC Calculated?
CARES Act (2020) – Employers who qualify can claim 50% of qualified wages paid to employees, limited to $10,000 per employee annually for wages paid between March 13, 2020 and December 31, 2020.
Consolidated Appropriations Act (2021) – Employers who qualify can claim 70% of qualified wages paid to employees, limited to $10,000 per employee per quarter for the first two quarters of 2021.
American Rescue Plan Act – The credit remains at 70% of qualified wages up to a $10,000 limit per quarter. As an employer, you’re therefore entitled to a maximum of $7,000 per employee each quarter, or up to $21,000 for 2021 after the enactment of the Infrastructure Investment and Jobs Act into law on November 15, 2021.
The Infrastructure Investment and Jobs Act
The passage of the Infrastructure Investment and Jobs Act retroactively ended the program for most businesses on September 30, 2021.
Recovery startup businesses are, however, still eligible for ERC through the end of the year. These are businesses that started after February 15, 2020 and generally had an average of $1 million or less in gross receipts.
While the Employee Retention Credit will not be applicable in Q4 2021 or beyond, if you haven’t taken advantage of the credit at any point from March 2020 through Q3 2021, you still have an opportunity to claim it by amending prior returns.
In fact, businesses have up to 3 years from the sunset of the ERC program to ascertain whether wages they paid after March 2020 through the end of the program are eligible.
2022 ERC Eligibility
The good news is that eligibility for credit is not stringent.
You can access the credit as long as your claim aligns with a specific quarter of 2020/2021 operations. You just need to adhere to 2 conditions:
1) Have fully or partially suspended business operations reducing your operation hours due to government orders
2) Have reported a substantial decline in gross receipts.
If you’re looking to claim a prior credit, here are some key attributes to keep in mind:
Eligible businesses include universities, colleges, hospitals, and medical care providers
You may still be eligible for the credit if you’re a PPP loan recipient
More beneficial credits are available for employers with <500 employees
Claiming the ERC
There’s no ERC application. Instead, you can claim the ERC on your federal employment tax returns.
Easy, right? Not so fast.
Suppose you’re eligible to claim the new ERC. In that case, you will need to report your total qualified wages plus the related health insurance costs for every quarter on your quarterly employment tax returns. The credit is taken against your share of Social Security tax, but the excess is refundable under normal procedures.
Contact Us
With much uncertainty affecting small and medium businesses alike, the ERC will cushion you against grievous losses and help you stay afloat.
Understanding how to make a claim can be a hassle—a real one. Here at the Tax Girls, we have the know-how to help you navigate the ERC application process.
Feel free to call us on 310.541.2441 for more information.