ERTC Funding: Top Tips to Keep In Mind
According to one survey, 43% of businesses were temporarily closed because of COVID-19 safety measures. If you were a business that was affected by these government measures, then you may be eligible for funding that can make up for the loss in profits. The ERTC funding was money from the government to ensure that businesses could still pay their employees during economically hard times. And yes, you can still qualify for it even after the COVID-19 pandemic.
Keep reading to learn all of the best tips on claiming ERTC.
What Is ERTC Funding?
The Employee Retention Tax Credit (ERTC) funds are also known as the Employee Retention Tax Credit. This program was originally created by Congress in March 2020 with the CARES Act. It was made in response to the COVID-19 pandemic to help businesses pay their employees.
ERTC funds were available for qualified employers to be able to pay their employees. When the COVID-19 pandemic continued into 2021, it was also available through September 2021.
However, even if companies did not claim this credit during either of those years, they may still be eligible to claim it because of the recent Infrastructure Investment and Jobs Act.
The tax credit incentivized businesses to keep their employees on their payroll during hard economic times. In 2020, employers were able to claim up to $5,000 for each employee for the rest of the year.
In 2021, they raised it to $7,000 for each employee for the first three quarters of 2021. Over time, it continued to change with each act and legislation, which can make it a little bit confusing to understand.
Congress then also released the Coronavirus Response and relief Supplemental Appropriations Act as well as the American Rescue Plan Act. This way, companies could use the credit as well.
Who Qualifies for ERTC Funding?
The employee retention credit is designed for small businesses that were losing money because of the pandemic. However, not every company was eligible for employee retention credits.
Private companies, even nonprofits, were able to qualify if they met certain criteria. However, government employers or self-employed people with no employees were not eligible for the credit.
For example, your business had to have been partially shut down because of the government in either 2020 or 2021.
You also had to show your gross profits for a quarter in 2020 and show that you lost 50% of those profits. You’ll need to compare it with a similar quarter in 2019 for the 2020 tax credit.
For the ERTC 2021 credit, you’ll need to have gross receipts for one quarter in 2021 and provide that it decreased by 20% of the same quarter in 2019.
If you did not have your company started in 2019, you could use a quarter in 2020 to show that you had reduced revenue to qualify for this credit.
While startups may have not been in business in 2020, they are still eligible. But you’ll need to qualify as a business recovery startup business. To qualify as that type of business, you will have to have started your business after February 15, 2020.
If you’re a startup, you’ll have different qualifications to meet. You will need to show your gross receipts and prove that you made under an average of $1 million in revenue. If this is the case, your total credit would be $50,000 for each quarter.
How Does the Funding Work?
If you qualified for that credit and got it, then the credit is a refundable tax credit. Instead of receiving a lump sum payment, you’ll just subtract that amount from your business taxes for that year.
In 2021, businesses could subtract up to $26,000 for each employee from their taxes especially if they maximized their credit. In 2020, they were eligible to have $21,000 for the year.
Only businesses can claim this credit, and you’ll need to have full-time or part-time employees on your payroll, not just hiring contractors or freelancers.
A tax deduction will help reduce the amount of a business’s taxable income. The tax will subtract the tax that the business owes, to begin with.
How to Calculate ERTC
Depending on which credit you are claiming, there are a few different ways to calculate it. For example, if you are claiming the credit for 2020, you will need to calculate it at a rate of 50% for all of the eligible wages. In 2020, you can claim up to $21,000 for each employee that year.
Remember, that if you were a qualified business, you can claim up to $5,000 for each employee for all of 2020. The maximum credit for 2021 is $7,000 for each eligible employee. You can claim up to $26,000 for each year in 2021.
How to Account for ERTC
When you are applying for a retroactive ERTC credit, you will also need to know how to account for it. There are certain standards that govern it.
For example, you should apply Accounting Standards Update Subtopic 958-605. That is because the government considers the ERTC as a conditional grant. This is because only companies who qualify can take this funding out.
When you file for this, make sure that you comply with the accounting standard. Your business should follow the presentation and disclosure policies for whichever accounting standard you choose.
For example, you should take your gross profits into account rather than your net profits. That’s because the ERTC focuses on your gross profits rather than net profits.
In addition, if you do get the ERTC, you should record all of the expenses and contributors as gross as well. You will also want to record it as a credit to ensure that you can have a debit for your accounts receivable. If your organization received credit as an advance payment, the refundable payment is credited while the cash is debit.
Disclose All Information
In addition to providing information about the credits that you received, you’ll need to disclose certain information because of ASU 2021-10. There are amendments in this that require businesses to list disclosure about any transactions they have with a government entity.
These disclosures will then be taken into account when you apply your contribution or credit. You’ll also need to disclose information on the reason for those transactions and any accounting policy you used.
In addition, you’ll need to disclose the line items on the balance sheet and income statement. These items could be affected by the ERC.
You will also need to disclose any significant information that is in the terms and conditions of the transactions. You’ll also want to disclose the contingencies and commitments.
If you’re not sure of what information you should disclose, there are accountants out there that can help you navigate all of this.
How to Retroactively Claim Funding
If you did not claim the funding in 2020 or 2021, there is still a chance that you can still retroactively claim it for your business. This is because of the IRS notice about being able to claim this. The notice they sent out tells employers how they can claim the ERTC.
The notice tells employers that if they took a PPP loan, they can now claim that credit. Originally, if a business took a PPP loan, they were not eligible to claim the ERTC credit either.
However, if you want to claim the credit now because you took out a PPP loan, you will need to fill out the 941 Form. This is the Adjusted Employer’s Quarterly Federal Tax Return claim. You’ll need to fill this form out multiple times if you want to claim the credit for multiple quarters.
The IRS provides examples of how to fill out the form, but the IRS also gives you samples to guide you through it. However, you can also hire a company that can fill out these forms for you.
If you qualify for this claim, you’ll need to submit the form, but remember that it’s not a write-off. It will reduce a portion of the amount of taxes that you will owe, and businesses will then have two options on how to apply it.
Businesses can claim it on Form 941 and receive a refund on the taxes that they paid in the previous years. If they do not want to do that, they can file to reduce the amount of employment tax deposits based on how much they expect to get back from the ERTC.
However, if your credit is more than your payroll taxes, you’ll be able to ask for an advance payment. To do that, you will also have to fill out Form 7200 and file it with the IRS.
Common Funding Mistakes
When you are claiming this funding retroactively, then you will want to avoid some of the common funding mistakes that might cost you money. Because of how many things changed and the different rules for each year, it’s common for businesses to make a mistake when they file for funding.
For example, many companies still believe that if they took a PPP loan, they cannot get credit. However, this has now changed because of the Consolidated Appropriations Act. Congress got rid of the restrictions that said you could only claim one.
Another thing that many businesses do not realize is that they had to be completely shut down to claim the credit. However, even if businesses were partially shut down because of the government, they qualify. They had to have had some restrictions either due to the local or federal governments.
A business might have reduced the number of hours worked, had to accommodate for cleanings or sanitization, have limited capacity, the vendors or part of your supply chain shut down, or you may have had to shut down certain locations of your business.
The main question that business owners should ask themselves is if their business was unable to continue normal operations because of some government ordinance. If so, did this negatively affect your business’s operations?
If you answered yes, then you’re likely going to be able to qualify. In addition to that, you’ll need to look at your gross receipts to see if you lost money.
Find a Professional Accountant
If all of this sounds confusing to you but you still want to take advantage of this credit, there are professional accountants that can help. There are many businesses that can help you claim this credit.
While you can do it on your own, filling out this paperwork can be exhausting and confusing. You’ll need to fill out Form 941, but if you do not know how to fill out the form, the whole process can be very confusing.
If you want to ensure that your credit has the best chance of being retroactively granted, you should hire professionals that can maximize how much you can get back for your business.
They will also walk you through the entire process and give you an estimation of when you will receive that credit. They’ll also let you know how likely you are to be approved for that credit.
If you’re a small business and do not have your own accountant or experince in accounting, it might be worth it to hire an ERTC specialist. Doing so will ensure that you receive the most money possible while also keeping your business safe from any mistakes in the filing.
Discover More About ERTC Funding
These are only a few things you’ll need to know about ERTC funding, but there are many other things that you’ll want to know before you file for the credit.
If this all sounds confusing to you and you’d rather have someone manage this for you, you should find a business that can help you.
Check out our website to find more help with filing for ERTC credit and maximizing the amount of funding that you can get back for it.