Employee Retention Credit: Everything You Need to Know
What if financial help was waiting for your business and you didn’t even know it? The employee retention credit (also known as the employee retention tax credit, or ERTC) was designed to help small businesses keep employees on the payroll during the COVID-19 pandemic.
While this is a great program, relatively few small business owners took advantage of it. In fact, only 10% of business owners took advantage of the credit for the first two quarters of 2021. And while more business owners expressed an interest in using this program, only 4% felt very familiar with how it works.
That’s where this guide comes in. It will help you learn more about the ERTC and answer your biggest questions. Keep reading to learn what you need to know to help your business out today!
What Is the Employee Retention Credit?
The Employee Retention Credit was designed to help small businesses that lost revenue due to the COVID-19 pandemic. If the pandemic caused a business to lose money in 2020 or 2021, the ERTC allowed those businesses to get a tax credit.
The original goal of the tax credit was to help businesses keep employees on their payrolls. By helping businesses during this difficult time, the government hoped to minimize potential damage to the economy.
By now, many businesses affected by COVID-19 have either stabilized or gone under. However, if your business was affected during those years and you did not already apply for the ERTC, it is not too late for you to qualify.
How Does the Retention Credit Work?
To receive the ERTC, you must first apply and provide proof of documetnation that your business and your emplyees qualify under the terms created by the government.
Our guide is going to review different factors that can determine whether or not your business qualifies. These factors include things like qualified wages and what your employee cap is.
The biggest limiting factor is the specific date range. ERTC qualifications require that your business was affected by the COVID-19 pandemic between March 12, 2020, and January 1, 2021.
What Companies Qualify For the Retention Credit?
Not all small businesses automatically qualify for the ERTC. In order to qualify, your business must demonstrate that the government partially or fully shut your business down between March 12, 2020, and January 1, 2021. Alternatively, you must demonstrate that you lost a certain percentage of wages during a specific period of time.
Of these, the most straightforward ERTC qualifications involve your business being shut down by the local government. If this has happened, the federal government will be happy to give you a tax credit in compensation.
You can also qualify for the ERTC if your wages suffered. For example, you can qualify if your gross receipts for the any quarter of 2020 were at least 50% lower than the same quarter of 2019. This enables you to receive the 2020 credit.
You can get the 2021 ERTC if your gross receipts for any quarter in 2021 were at least 20% lower than the same quarter of 2020. As you can see, the 2021 credit is easier for most businesses to qualify for.
Which Employees Count Towards Your Business Eligibility
If your company has 100 or fewer employees, then all of those employees count towards your ERTC eligibility. This is true even if some of them were not actively working during the affected time period. If your business has more than 100 employees, then only the full-time employees who were paid but not providing services are eligible.
Because of this, it is often easier for smaller businesses to apply for the ERTC. However, so long as you have the paperwork (such as gross receipts) to back up your claims, it is worth it for larger businesses to proceed with ERTC filing.
When filing, it’s important to understand certain restrictions on this credit. For example, when claiming employees, you cannot claim the same person for both ERTC and the Work Opportunity Tax Credit during the same affected period. Similarly, you cannot claim the same employee for both ERTC and the employer credit within the Family and Medical Leave Act.
Do I Have To Pay This Credit Back?
No, you do not need to pay the Employeed Retetion Tax Credit back. The Employee Retention Tax Credit is structured as a credit rather than a loan.
This can be confusing for many business owners because the money in question is sometimes referred to as a loan. Fortunately, this is not a loan and you are not obligated to repay.
To best understand this credit, you should think of it as a belated “thank you” from the government for doing your part to keep the economy strong during the pandemic. The goernment wants to help reward you for your efforts.
Figuring Out the Size of Your Employee Retention Credit
It’s exciting to think about how much you could get back from the ERTC program. However, figuring out exactly how much you are going to get will require some calculation.
On the most basic level, you can apply for up to 70% of the qualified wages paid to employees during the dates mentioned earlier. However, the way “qualified wages” is defined depends on the size of your company.
As of the beginning of 2021, “qualified wages” for companies of 500 or fewer employees means all wages paid during a period in which your business was shut down (either fully or partially). If your business has more than 500 employees, “qualified wages” means only wages paid to employees who were not providing you any of their services during the time you were shut down.
No matter how many qualified wages you have, the qualified wages are limited to $10,000 per employee. Because you can apply for 70% of the qualified wages, that means you can apply for $7,000 per qualifying employee.
How Long Does It Take to Get the Credit After Applying?
The IRS reports that after forms are filed, it can take between 6 to 10 months to get reimbursed. Please keep in mind, this is an estimate and it varies based on mitigating factors.
For example, the initial estimate was based on businesses that had already filed their paperwork. And it was based on the relatively small number of businesses that were applying for the credit.
If many more businesses apply for the credit, or if you apply closer to tax season, it could take longer than you expect. You should file for this credit sooner rather than later to get a quicker reimbursement.
Is It Too Late To Get This Tax Credit?
The window for the ERTC covers qualifying wages between June 30, 2021 to January 1, 2022. Even though that time has passed, you can still apply for the tax credit.
This is the main reason it is so important to “spread the word” about the ERTC. To this day, only a small fraction of qualifying businesses have applied for this credit. If you have qualifying employees and wages during this time and you do not apply, it’s effectively like leaving money on the table.
And while you can still apply for the tax credit now, there may come a time when the government stops accepting applications. As always, it’s worth acting now rather than waiting too late!
How Does the Retention Credit Work With PPP?
You can receive both the ERTC and PPP loan benefits. There is still widespread confusion over this matter because, for a time, businesses had to choose one over the other.
When the ERTC was first unveiled, any business that accepted a PPP loan could not also benefit from the tax credit. However, this all changed at the end of 2020.
In December of that year, the Consolidated Appropriations Act allowed smaller businesses to benefit from both ERTC and PPP. However, if you try to use both, you need to be careful about payroll expenses. You are not allowed to count the same expense as a forgivable payroll cost under PPP and an ERTC wage at the same time.
Can I Not Get the Credit If My Business Started In 2019?
It is still possible to get the ERTC if you started your business in 2019. This is due to how the government views quarters of operation for a brand new business.
In short, until your business has been operating for one year, the first quarter of operation “counts” when you are calculating revenue loss. Therefore, it’s possible for a business that opened in the second quarter of 2019 to demonstrate a revenue decline in the first half of 2020, allowing that business to file for ERTC.
Keep in mind that all of this doesn’t have to be a guessing game between you and the government. You can always consult with ERTC professionals to make sure that you have a good case before you proceed with the paperwork (more on this later).
I’m Worried My Revenues Didn’t Decline Enough To Get the Credit
Some businesses hesitate to apply for the ERTC because they worry that their wages did not decline enough to qualify. However, the IRS made a few modifications that might make it easier for your business to qualify.
For example, let’s say that your revenue for one quarter did not decline more than 20% relative to the same quarter last year. This does not mean you have to give up!
If this happens, the IRS lets you compare to the previous quarter. So, instead of comparing the first quarter of 2021 to the first quarter of 2020, you could compare the first quarter of 2021 to the fourth quarter of 2020.
In some cases, this alone is enough to help you get the credit because it is easier to demonstrate a revenue decline. On top of this, the IRS lets you exclude certain things from your gross receipts.
This includes money from a PPP loan and money from Restaurant Revitalization Grants. It also includes money from Shuttered Venue Operators Grants.
It can be difficult to crunch all those numbers to determine ERTC eligibility, but it might be worth it for your business. And remember, you do not have to figure everything out on your own!
You Don’t Have to Figure Out ERTC All On Your Own
To some business owners, the entire Employee Retention Tax Credit business can seem a bit scary. After all, handling things like taxes and payroll can be fairly intimidating for the average business owner. Adding ERTC paperwork on top of everything else may be enough to give you some serious anxiety.
However, good business owners know that the secret to a successful business is delegation. You do not have to handle everything on your own, nor should you. Instead, you need to find the best people for the job who can take care of things.
When it comes to ERTC, there are professionals who have done this countless times for businesses like your own. And these professionals can help with every step of the process. That includes everything from helping you calculate your gross receipts and qualifying wages to actually applying for the tax credit.
And if you’re ready to get started, here’s some good news: help is just a click away!
Get Help With Your Employee Retention Tax Credit Today
Now you know everything you need to know about the employee retention credit. But do you know who can help you make the most of this credit without getting bogged down by paperwork?
We specialize in helping businesses just like yours with every aspect of the ERTC. Are you worried about whether you qualify, or you’re not sure what different terms on the forms mean? We’re here to help.
Ready to get as much for your business as possible? All you have to do is contact us today!