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Does Your Business Qualify for the Employee Retention Credit?

Many businesses still do not know about the Employee Retention Credit (ERC).

With the labor market tighter than ever, businesses are struggling to keep employees and incentivize new staff by raising wages and offering hiring bonuses. The competition for labor is tougher than ever, and small to mid-size businesses must adapt in order to survive.

How can the ERC help small to mid-size businesses?

Small and midsize businesses can get cash directly from the federal government through the Employee Retention Credit (ERC), which offers businesses money back on a percentage of wages paid to their employees. Qualified businesses are entitled to get money back from the government through a credit against the employment taxes they pay. 

Many business owners are already taking advantage of the ERC. “This helps them offset wages, wage increases, as well as some of the pay for new employees they’re bringing in,” Paychex CEO Marty Mucci told Jim Cramer on CNBC”s “Mad Money” last Tuesday. “We’ve already processed over $3 billion worth of employee retention tax credits, which is cash in their pocket to help them out right now.”

How does the tax credit work?

The ERC started with the first federal Covid economic relief package, and it was recently expanded to give businesses the opportunity to claim more money back from wages they paid to employees in 2020 and 2021. Businesses can get money for wages paid through the end of 2021 and retroactive payments for 2020 wages.

Eligible businesses can claim up to 70% back on up to $10,000 in wages paid to employees, or a maximum amount of $7,000 per employee for each quarter of the calendar year. It adds up to a potential total of $28,000 in cash back per employee annually.

The Employee Retention Credit is geared towards small and midsize businesses (must have 500 employees or less to be eligible). Businesses currently need to see a 20% reduction in gross receipts in one 2021 quarter compared to the same quarter in 2019, or if they didn’t see this reduction, businesses would need to have been partially or fully shut down by government during the quarters for which they are claiming the ERC. The 2020 CARES Act legislation required gross receipts in a calendar quarter below 50% of gross receipts when compared to the same calendar quarter in 2019 to qualify.

How to get ERC money back from the IRS

For an employer who already paid 2020 taxes, the ERC can reduce their overall liability and the cash claimed retroactively. To get the ERC money back in the form of a refund on taxes already paid, business must fill out an advance payment form, or Form 7200 with the Department of Treasury’s Internal Revenue System, or they can process it through a payroll company like Paychex.

A serious perk to the ERC is businesses can receive money immediately instead of waiting to be reimbursed later in the year. The credit can amount to a dollar-for-dollar cash refund up to the maximum of $7,000 per employee per quarter in 2021. Start-ups that were formed after Feb. 15, 2020 and were forced to shut down may be allowed a larger credit.

The specific quarter for which a business is claiming the credit — businesses typically file employment taxes quarterly — makes a big difference, and makes 2020 the year during which more labor costs are likely to be eligible. Business is performing better in 2021 than it was in 2020 so the qualification related to decline in gross receipts versus 2019 may no longer be met. Tax professionals urge businesses to be mindful of the ERC requirements and focus on claiming the ERC money for the quarters in which they qualify.

Things to consider when filing taxes

Wages count toward this cash back incentive only if they apply to the FICA tax, which is the U.S. federal payroll tax, and wages paid to a business owner’s relatives are not eligible. Though money used for hiring bonuses to compete with the likes of Amazon and McDonald’s can count as eligible wages for the ERC.

The first economic relief package did not allow businesses receiving Paycheck Protection Program loans to claim the ERC, but now they can as long as they exclude any PPP loan money used to pay wages, and importantly, have not applied for PPP loan forgiveness. Employers have a choice as to whether they apply for forgiveness on the PPL loan or ERC. If they apply for forgiveness and are denied, they can still apply for the ERC after. And in addition, any wages outside those paid for from PPP loan funds are still eligible for the ERC.

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Source: Investopedia: How the Updated ERC Works and How to Get It (June 29, 2021)

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