If you retained your employees during the pandemic, the Employee Retention Tax Credit could save your business up to $19,000 per employee. Read on to find out if you’re eligible.
With the pandemic continuing to financially impact small businesses across the country, many have turned to the COVID relief programs made available through the 2020 CARES Act for support.
While some of these are well known, like the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL), there is one lesser known program that you should be aware of. The Employee Retention Credit (ERC) can be just as beneficial, if not more so, than the other relief programs available to your business.
If the pandemic impacted your business in 2020 and is continuing to negatively impact it, you could be eligible for up to $19,000 per employee through the ERC program.
What is the Employee Retention Tax Credit (ERC)
The IRS included a new tax credit in the CARES Act. It allows businesses that retained their employees during the pandemic to get a refundable credit for up to $10,000 in wages paid, also known as the Employee Retention Credit.
Unlike other COVID relief programs, the ERC is not a loan. It is not money that needs to be repaid or tracked and forgiven later. This is a check directly from the IRS designed to support small businesses that have been negatively impacted by the COVID-19 pandemic.
Originally, the ERC was designed as an alternative to the better known PPP program and you could not get both. But that was changed when the second round of stimulus funding was announced in December of last year. Since then, businesses that received PPP or EIDL funding, also qualify for the ERC and can retroactively claim it for 2020.
How Much Is This Credit Worth?
The Employee Retention Credit can be worth up to $19,000 per employee. It is broken down in 3 ways:
- 2020: Businesses can claim the ERC once in 2020 for up to $5,000 per employee.
- Q1 of 2021: Businesses still impacted by COVID from January to March of this year, can claim the ERC again. It is worth up to $7,000 per employee for the first quarter of 2021.
- Q2 of 2021: If your business continues to be negatively impacted from April, 2021, through the end of July, you can claim the ERC once again. It is worth up to $7,000 per employee for the second quarter of 2021.
This means that if your business experiences a prolonged financial impact from the pandemic, you could claim the credit three times and potentially earn up to $19,000 per employee.
The amount each employee qualifies for is calculated based on what they were paid. The ERC will pay up to 50% of an employee’s income for 2020 and up to 70% for 2021.
Who is Eligible to Claim the ERC?
There are two rules that determine whether a business qualifies for the ERC and you need only fit under one of them to claim your credit.
The first rule is that your business must have experienced a decrease in revenue. If in 2020, your business experienced a 50% decrease or more in revenue over any given quarter, you qualify for the ERC. For 2021, the restrictions have been lowered to only a 20% decrease in revenue.
The second rule, which is much more open ended, is what the IRS calls “A full or partial closure” of your business. This means that if your business was disrupted by a government mandate due to COVID-19, you qualify for the ERC. There are many government mandates that are still in place and impacting businesses. Depending on what industry you work in, it is possible that a government mandate is contributing to the ongoing financial hardship that your business is facing. If this is true for you, you qualify for the tax credit.
These mandates can include a six-foot spacial restriction between people in your work space, being forced to work from home or having to have meetings online instead of face-to-face. Maybe your supplier isn’t able to ship anything or the government agency you file important paperwork through still hasn’t reopened. Any number of mandates will qualify you for this credit.
To be clear, only one of these rules needs to apply to your business in order for you to qualify for the Employee Retention Credit.
Here’s an Example: Hannah’s Interior Design
A great example would be an interior design team. Because of state regulations, Hannah’s team was not allowed to do home walk-throughs with clients. They were restricted to online meetings only. They also experienced delayed shipments for many home decor items they purchased for their clients, due to new COVID protocols. Hannah kept all three of her employees on her team through the end of the year.
- Employee 1 was paid $26,000
- Employee 2 was paid $16,000
- Employee 3 was paid $7,000
Employees 1 & 2 both qualify for the max amount of $5,000, while Employee 3 qualifies for $3,500 (or 50%). This means that in total the company could claim $13,500 in funding from the IRS for 2020.
How do I Apply for the Employee Retention Credit?
If your business is eligible for the ERC, you can apply through your payroll provider. They would need to amend what is called your 941 reports, that detail wages paid through each quarter and the associated taxes. Through this process, you are reallocating “regular” wages as “ERC” wages. It’s important to note that this is a new program and it’s possible your payroll provider is still getting up to speed with the application process.
A professional accountant, like a member of our team at COS Accounting & Tax, can also help you apply. The COS team has been helping small businesses get access to the ERC since the program was announced in 2020. We know the program inside and out and will help make sure you claim the maximum amount possible. Learn more about our ERC services or schedule a call with a member of our accounting team.
How Soon Will Funds Arrive?
Unfortunately, the IRS does not disclose processing times, so your check could take 12 weeks or more to arrive. It’s important to note that the funds will not be available by direct deposit. You will receive a physical check in the mail at the listed address of your company.
Can I use PPP Funds to Qualify for the ERC?
While you can still claim the ERC if you took PPP funds, you cannot use forgiven wages to qualify for the ERC. Any wages paid out using PPP money do not qualify towards the credit.
For example, if you took PPP and it arrived in May, and you used PPP funds for May and June payroll, the ERC would only count towards payroll for the months of March, April, July and so on.
What Type of Employees Count Towards ERC?
Only W2 employees are eligible for the ERC. There are alternative solutions for business owners, depending on their circumstances. For example, a single member LLC, or 1099 employee, could restructure their business as an S-Corporation, allowing them to be both the owner and an employee.
While it may sound complicated, the process is very simple and can be well worth the savings. COS Accounting specializes in one to two person businesses and has helped thousands of clients set up S-Corporations to ensure access to tax credits and savings. We will make sure you claim as much ERC funding as possible. You can also schedule a call just to get your questions answered regarding the best approach for YOUR business.
How Many Times Can I Claim the Credit?
Assuming you qualify according to the IRS rules, you can claim the ERC up to three times. It can be claimed once for 2020 and twice for 2021: once in Q1 (January – March) and once for Q2 (April – July). The Employee Retention Credit program expires on July 31, 2021.
Reopening Your Business After COVID-19: What to Prepare For
18 Passive Income Apps For Making Extra Cash on the Side
Coronavirus & Small Businesses Resource Hub