Is It Too Late? How to Claim ERC
Did you know that the number of small businesses in the US is 31.7 million? Additionally, small businesses account for 99.9% of US firms, and they make up 97.5% of exporters.
However, they’re finding it difficult to retain and hire workers.
If you’ve been having difficulties with keeping your workers at your small business, you might be looking for help from the government.
You might be wondering how to claim ERC. However, if you don’t know how to do this, you might feel stressed.
Fortunately, in this article, we’ll review how you can complete an ERC claim for your business. Finally, you can take advantage of the employee retention tax credit and get the help you need. Read on to learn more.
What Is the ERC?
If you’ve been asking yourself the question, “What is ERC?” or “What is ERTC?” we’ll answer that question now. It helps to begin with providing the ERC meaning, which is employee retention tax credit. This is a refundable tax credit Congress created in 2020.
Its creation came about when Congress passed the CARES Act that same year. The long name of the CARES Act is the Coronavirus Aid, Relief, and Economic Security Act of 2020.
This act underwent several extensions, changes, and expansions from when it was passed in 2020 until it ended in the later part of 2021.
Unlike other relief programs related to the pandemic, the ERC isn’t a loan. This means that employers won’t have to pay it back.
For employers that were eligible, the ERC looked different depending on if they were claiming the 2020 ERC or the 2021 ERC. For the 2020 ERC, the maximum tax credit amount the employer could get was $5,000 per employee.
This was with 50% of wages that were qualified (with a maximum of $10,000 in wages) paid (to each employee).
For the 2021 ERC, the maximum credit amount the employer could get was $21,000 per employee. This was 70% of wages that were qualified being paid (to each employee), per quarter (Q1 to Q3).
Qualifying Wages
Qualifying wages include any wages or salary paid to employees (during the quarter). They also include qualified health plan expenses that were paid to those employees. This is the case even if the business never paid the employees any other wages.
Why You Should Claim the ERC Credit
The ERC has, over the last two years, gone through a variety of iterations. As a result, many small business owners have been struggling with putting through ERC claims. However, there are great reasons to claim the ERC credit because of these changes.
Double-Dipping ERC and PPP
Originally, it wasn’t possible for business owners to double-dip on ERC and the paycheck protection program (PPP). However, later, this was retroactively amended. As a result, small businesses were able to claim the ERC even if they had taken a PPP loan out.
This said, however, they couldn’t claim the IRS ERC on wages that had already been covered by the PPP loan they’d received.
Credit Amount Change
The credit amount that you can get, as a business owner, through the ERC program has changed. The ERTC tax credit for 2021 could amount to, therefore, was different depending on when in the year employers were claiming for. The employee retention credit for 2020 was also impacted.
For the wages that an employer paid between the 12th of March, 2020, and the end of the next year (2021), the maximum amount businesses would be able to qualify for (per employee) was $5,000.
For the wages that an employer paid between the 1st of January, 2021 and the 30th of September, 2021, the maximum amount businesses would be able to qualify for (per employee and per quarter) was $7,000.
Therefore, after this change, getting the employee retention credit became an option that was much more enticing for small business owners. While this is a great opportunity, some challenges make this process difficult.
Why Claiming ERC Credit Is Such a Challenge
One of the big problems small businesses come across when they’re thinking of claiming ERTC is that they don’t often have payroll. Single-member LLCs and solopreneurs, especially, won’t have a payroll that’s formal. They might not even have themselves on a payroll that’s formal.
As a result, when it comes to the businesses that are meant to claim ERC, there are many that aren’t getting the help from the government that should be.
The Solution
Fortunately, there is a solution for businesses that have ERTC eligibility for 2021 and want to get some money now that the retroactive ERC changes have occurred. What they’ll have to do is amend their tax returns from prior years so that they can lower the accompanying payroll expenses.
Note that, when these businesses do this, they should choose the right year for reducing expenses. It should be the year in which they’re claiming the credit—not the year in which they’re receiving the ERC.
So, for example, if you’re claiming ERTC for 2021, you should amend your tax return from 2021 to lower that year’s accompanying payroll expenses.
Note that the IRS has said that it might take a year for the processing of some ERC claims to occur. For this reason, this situation does have a drawback.
When they amend their business and personal returns (from the prior year), they’ll have to do this without having cash in their books or hand from the credit.
How to Claim ERC
There are several steps you have to take to claim the ERC credit as a business owner. By going through these steps correctly, you’ll be able to determine whether you can get a large chunk of money from the government.
Step 1: Determine Your Eligibility (And a Few Other Things)
The first step you need to take is to determine whether your business is eligible to receive the ERC. To do this, you first need to determine whether your business or trade was one you carried actively during the 2020 and 2021 calendar years. Note that this includes organizations that are tax-exempt.
Next, once you’ve established this, you need to know whether you meet one of the required criteria for receiving the employee retention credit. You can do this by meeting at least one of the tests below.
Government Order Test
One criterion is that your business was partially or fully suspended (during the calendar year) because of an appropriate government authority’s orders. Specifically, these orders must have been because of the COVID-19 Pandemic.
These must have been orders that limited group meetings (for religious, social, or commercial purposes), travel, or commerce.
Reduced Gross Receipts Test
Another criterion is that your business suffered a decline that was significant in gross receipts. However, it can’t be any decline. The percentage of the decline would have to be a certain minimum, with this minimum being different for 2020 and 2021.
If you’re using this test, there is a specific definition for a decline that was significant in gross receipts for 2020.
This definition says that the decline must have been 50%, at least, in any 2020 calendar quarter, as compared to the same calendar quarter as it existed in 2019. For 2021, things look a little different.
This is because there is a test you can use in addition to an alternative method.
The first method for the test for 2021 is similar to the one for 2020. If you’re using this test, there is a specific definition for a decline that was significant in gross receipts for 2021.
This definition says that the decline must have been 20%, at least, in any 2021 calendar quarter (through the 30th of September, 2021), as compared to the same calendar quarter as it existed in 2019.
Note that, if the above test fails for the year 2021, there’s a special rule for 2021. You can use this special rule as an alternative method.
With this method, the employer can utilize the immediately previous quarter’s gross receipts compared to the same 2019 quarter so that they can come to a decline in gross receipts that is greater than 20%.
To Note
There’s a specific definition you must use for gross receipts when you’re using the Reduced Gross Receipts Test. These include all receipts that have been received. This is the case whether or not the derivation of the accounts has occurred in the taxpayer’s businesses’ or trade’s ordinary course.
You should also note that affiliation rules exist that apply to businesses that are commonly owned. This could impact your business’s eligibility for the ERC.
Determine Qualifying Wages (Per Employee) For ERTC
If you’ve determined that you’re eligible, the next step is to determine the qualifying wages (per employee) for ERTC. For 2020, this means that you can get 50% back of what you paid in wages to your employees (in a calendar quarter).
Note that this only applies to wages you paid after the 12th of March, 2020, and before the 1st of January, 2021. Per employee, the maximum is $10,000.
So you could get back $5,000 max per employee. If you paid exactly or less than $10,000 to an employee, then you could get back 50% back of that.
For the year 2021, this means that you can get 70% back of what you paid in wages to your employees (in a calendar quarter). Per employee, the maximum is, per 2021 calendar quarter, $10,000.
So you could get back $28,000 max per employee. If you paid exactly or less than $10,000, per 2021 calendar quarter, to an employee, then you could get back 70% of that.
Determine Additional Tax Benefits You Might Qualify For
Once you’ve determined your eligibility for ERTC and figured out what the qualifying wages are in your situation, you should determine additional tax benefits you might qualify for. This way, you can get as much money back as possible when you file your taxes.
You should also consider additional help you can get that has been provided for businesses because of the challenges they faced during the COVID-19 Pandemic.
Research the Paycheck Protection Program, the Small Business Administration’s COVID-19 Economic Injury Disaster Loans, and federal and state COVID grants. Then see if you can get money through one of these.
Step 2: Calculate the Credits
Next, you should calculate the ERC credits you’ll get. Note that it’s important to analyze and optimize how these interplay with your PPP, or Paycheck Protection Program, loans when you do this. The last thing you want to do is end up jeopardizing your PPP funds.
When it comes to employee retention credit FAQ topics, many people wonder about how PPP and ERC work together. This can be a bit confusing, so it can be wise to speak with a tax professional.
Step 3: Prepare Data and Documentation
Next, you have to prepare data so that you can input it into the From 941-X. You’ll also have to collect and prepare the documentation you’ll have to provide so you can demonstrate to the IRS that your business is eligible for the tax credit.
If you aren’t sure how to fill this document out, this is another scenario where working with a tax professional can help.
Need Help With Your Taxes?
Now that you’ve learned how to claim ERC, you might want help with your taxes. Maybe you want to understand how to file ERC as a personal or business matter or you want to learn whether there’s an employee retention credit for 2022.
Whatever you need help with, we can assist you. At ERC Smart, we’re experts when it comes to ERC.
We also have ERC services, so we can help you get your ERC, enabling you to get the maximum amount possible with this credit. To learn more about how we can help you, contact us now.