If you were brave enough to start your business during the COVID-19 pandemic, employee retention credits (ERC) could be available to you. But for maximum benefits it is essential that claims for employee retention credits are properly processed – including accurate calculations and documentation as well as coordination with other COVID-19 relief measures.
ERC provides eligible businesses that experienced full or partial suspensions, or a decline in gross receipts, with a refundable tax credit against payroll taxes.
Employee Retention Credit
If your business was established during the COVID-19 pandemic and still employs W-2 employees, you could qualify for the Employee Retention Credit. You can click the link: https://www.irs.gov/forms-pubs/about-form-w-2 for more information about W-2s.
Unlike its traditional requirements, this new category of ERC focuses only on your start date rather than its full or partial suspension of operations and reduction in gross receipts that is typical in COVID-19 affected businesses.
Under this new category, businesses may only claim up to 70% of qualified wages exceeding $10,000 paid per quarter; this amount is significantly less than what had previously been claimed based on total annual gross receipts (i.e. up to $100,000).
Eligibility criteria for this credit can be complex, and the IRS warns that fraudulent marketing claims made by businesses not eligible are being made in order to take advantage of it.
Consulting a tax professional will help ensure you receive all of the money that belongs to you – taking this opportunity can significantly boost cash flow, strengthen financial security and retain valued employees.
CARES Act
The CARES Act of 2020 introduced the Employee Retention Credit (ERC). As one of several COVID-19 relief measures implemented to assist companies through this pandemic, ERC loans provide small and middle-market businesses with assistance during a pandemic outbreak. Paycheck Protection Program loans cannot.
To qualify for ERC funding, a business must first meet two criteria. Either it must have experienced a government-mandated shutdown, or its revenue has fallen more than 20% year over year relative to 2019.
Furthermore, under the American Rescue Plan Act of 2021 a third criterion must also be met: it must be operating as a recovery startup business. You can click here to learn more about this law.
This means that new startups launched during the COVID-19 pandemic are eligible to claim ERC for wages paid during quarters 3 and 4 of 2021 – this could amount to significant money savings for struggling startups during a time when funds may have been short.
American Rescue Plan Act
The American Rescue Plan Act offers recovery startup businesses additional flexibility by enabling them to claim the Employee Retention Tax Credit (ERTC) in Q3 and Q4 of 2021. This refundable tax credit aims at keeping employees during times of turmoil while building team loyalty and increasing business stability; it must however, be claimed correctly to avoid penalties for noncompliance.
Best practices include accurate calculations and documentation as well as coordination with COVID-19 relief measures as well as seeking guidance from tax professionals.
For recovery startups to qualify for the ERTC, they must have started operations post-February 15, 2020 and not averaged more than $1 million in annual gross receipts over a three year period prior to tax year 2021.
Furthermore, eligible employees are excluded from qualifying wages, so owners or family member salaries don’t qualify. Although this credit only covers periods ending Q3 or Q4 2021, recovery startups that meet specific revenue reduction or government restriction criteria could still claim the credit earlier in their operations cycle.
Tax Credits
Employee Retention Credit can assist startup businesses by offering them a cash refund for payroll taxes that don’t need to be paid, which allows them to keep key employees during difficult times while improving financial stability and improving retention of key talent.
The CARES Act and American Rescue Plan Act both established the ERTC to provide additional assistance to small business owners. To be eligible for the Employment Related Tax Credit or ERTC for new businesses, companies must employ W2 employees and have average annual gross receipts of less than $1,000,000 over three previous years. Qualifying businesses could receive up to $50K quarterly credits (up to $100k total).
It is important to learn about these tax benefits; they could help to save your business thousands of dollars. Contact professionals to help you navigate this claims process.
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