In 2020, the COVID-19 pandemic created a ripple effect of challenges and disruptions for small businesses across the nation. Government mandates and shutdowns caused many businesses to see a significant decline in revenue, which in turn created the massive upswing of businesses that had to close their doors. The government created several relief programs with the goal of helping the economy recover and keeping businesses afloat during the unprecedented crisis. These programs were intended to give small businesses some financial backing in order to avoid permanent closures as well as to keep valued employees on the payroll.
What is the Employee Retention Credit?
The Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the CARES Act, was passed in March 2020. The goal of the CARES Act was to stimulate the economy by providing $2.2 trillion dollars of emergency assistance in response to the raging pandemic and the Employee Retention Credit (ERC) was a part of that plan. The ERC is a fully refundable tax credit that serves as the solution to get small businesses back on their feet and gives them the ability to keep their doors open. It has proved to be an extremely valuable form of aid for businesses navigating a post coronavirus outbreak world.
The PPP has been widely discussed but its lesser-known counterpart, ERC, might be just as beneficial in recovering lost revenue from your business! We’re here to show you what you need to qualify, and the steps needed to move forward to get your business back on track. Let’s get started!
Origins of the ERC
Many small businesses were experiencing the crushing effects of economic decline during the initial waves of the pandemic. The government wanted to create something that would be a lifeline in sustaining businesses and helping them recover lost revenue. The goal was to keep employees on the payroll even if business operations had to be scaled back or employees were not working during the time.
In December 2020, Congress passed the Taxpayer Certainty and Disaster Tax Relief Act of 2020 which expanded the ERC program since the credit was not reaching as many businesses as originally intended. The goal of the Relief Act was to provide relief to even more businesses and did so by expanding the category of employers that may be entitled to claim credit and changing the definition of qualified wages.
ERC credits apply to qualified wages paid to employees during these timeframes:
- Quarter 2 in 2020: March 13 – June 30
- Quarter 3 in 2020: July 1 – September 30
- Quarter 4 in 2020: October 1 – December 31
- Quarter 1 in 2021: January 1 – March 31
- Quarter 2 in 2021: April 1 – June 30
- Quarter 3 in 2021: July 1 – September 30
Eligible businesses may also file retroactively meaning that the timeframe to claim on past quarters will be open for about three years. You can apply for a retroactive ERC on qualified wages for prior calendar quarters by filing Form 941-X.
How much is it?
For 2020, the maximum credit per employee for the whole year is $5,000. For 2021, the maximum credit per employee is $7,000 for each quarter, bringing the grand total to $21,000 total for the year. This means you can receive up to $26,000 per employee!
How is ERC different from PPP loan forgiveness?
While both ERC and PPP were made with the intention of providing relief to businesses there are a few notable differences between the two such as funding and cost to participate in the program.
The PPP is a forgivable loan and if a business complies with the terms of the loan, which includes spending the funds on payroll, the loan will not need to be repaid. However, the ERC is a tax credit that is paid via a check from the IRS to businesses and will never need to be repaid.
Can I still apply if I received a PPP loan?
Absolutely! Initially, the CARES Act prohibited business owners that were participating in the PPP program to apply for the ERC. However, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 made it possible for businesses to take advantage of both the PPP and the ERC. Due to this change in federal law, there have been many misconceptions floating around and many business owners are still under the impression that they cannot receive both which is causing them to leave unclaimed cash on the table. The key to remember is that businesses are unable to claim the ERC for wages that were paid with PPP funds.
How do I know if I qualify?
The ERC program continues to offer significant, fully refundable tax credits to a variety of industries and employers who kept employees on their payroll even though normal business operations were not happening. Determining if you qualify for ERC might be confusing since it was rolled out around the same time as PPP, but that doesn’t mean you should shy away from reaping the benefits.
In order to be considered eligible for ERC, your business must have been negatively impacted in at least one of these two major ways:
- Full or partial shutdown due to government-mandated lockdown orders. This includes suspension in business, stopping business operations, reduction of hours operating, reduction in the number of customers allowed in the business, closing earlier for sanitation and cleaning, and decreased ability in providing service to customers.
- Significant decline in gross revenue. This includes a decline in sales and covers supply chain disruptions causing a delay in receiving important items to operate.
Example: If you own a restaurant and were forced by government mandates to operate at half capacity or provide take-out only.
The decline in gross revenue is covered by the date when the losses started to occur and end with the date when revenue climbed back up to at least 80%. In 2020, a 50% decline in gross revenue from 2019 is required to be eligible and in 2021, only a 20% decline in gross revenue from 2019 is required to be eligible.
What classifies as qualified wages?
Determining qualified wages is crucial to maximizing your tax credit and needs to be done so with compliance in mind. The IRS defines qualified wages as “wages paid by an Eligible Employer to some or all of its employees after March 12, 2020, and before January 1, 2021.” The first step when determining qualified wages is to decide how many full-time employees your business employed during 2019.
Depending on how many FTEs your business had in 2019, qualified wages could either refer to wages for employees who were unable to provide services due to a full or partial suspension of operations due to a governmental order or a significant decline in gross receipts or to wages of any employee during any period in the calendar quarter when business operations were either partially or fully suspended under the same circumstances. Utilizing a knowledgeable tax solutions provider, such as Stenson Tamaddon, can help you navigate the complexities of this process in a compliance-driven manner.
How does ERC benefit small businesses?
The ERC program can benefit your small businesses in a multitude of ways. Unlike the PPP loan, which may not be forgiven depending on how the funds were used, the ERC is a tax credit sent to your business to use as you best see fit. While qualified wages can not be applied to both the PPP loans and the ERC, you can leverage both programs to maximize the incentives for your business.
Why file with Stenson Tamaddon?
Stenson Tamaddon has extensive knowledge in finance and working with businesses of all sizes. It can be a daunting task to figure out all that is needed to file for ERC, which is why it is important to file with an experienced firm that is credible and knowledgeable on the subject. With Stenson Tamaddon, you can be confident that you and your business will be our priority and we will work diligently to get you the maximum amount of tax credits with the least number of risks. We will be able to determine and walk you through the process of determining if your business meets all the eligibility requirements to file for the ERC. Our job is to minimize the possibility of unclaimed money left on the table.
At Stenson Tamaddon, we pride ourselves on assisting small businesses to reach their full potential in filing for the ERC. We offer cutting-edge, compliance-first technology that supports client success in an efficient and safe manner. Businesses all over choose to work with us because we do not cut corners when it comes to your business!
- ERC is a fully refundable tax credit that does not need to be paid back
- You can retroactively file on previous years
- If your business has suffered due to restrictions brought on by the COVID 19 pandemic, you may be eligible
- You can get up to $26,000 per employee
- Must be filed on Form 941 which we will help ensure is filled out accurately
Reach out to one of our specialists today to learn about your business’s eligibility. Working with Stenson Tamaddon will save you time and give you peace of mind that your documents are filed correctly and accurately. We’re here to walk you through every step of the way so that you can get the money you deserve!