- Tax credit for businesses impacted by COVID-19
- Receive up to $26,000 per W-2 employee in credit
- Businesses created during the pandemic may also receive the ERC
The COVID-19 pandemic brought new challenges for business owners. You may have had difficulties with declining business, government shutdowns, or significant disruption to your supply chain. The U.S. Government created the CARES Act to help offset the repercussions of the pandemic. As part of the CARES Act, they introduced the Employee Retention Credit. The ERC created tax credits for any business or non-profit affected by the pandemic that met certain criteria. The tax credit is based on wages paid to W-2 employees during a specified period of time. Businesses have until 2025 to file for the ERC.
Now, if you started a new business during the pandemic, the American Rescue Plan also added tax credit opportunities for you. The ARP designated new businesses as recovery startup businesses. This gives tax credits to businesses created after February 15, 2020, that do not meet the other criteria specified in the ERC.
What is the Employee Retention Credit?
The Employee Retention Credit, along with CARES Act, was passed in March 2020. Since then, the ERC has evolved to be more beneficial to businesses and ensure that businesses get the full benefit. If you started a new business during the pandemic or were affected by government shutdowns, you may qualify for the ERC.
If you were running a busy restaurant in February of 2020 and the pandemic forced you to close your doors for some period of time or drastically reduced your gross receipts, the ERC allows you to receive a tax credit for some of the W-2 wages paid at the time. The maximum benefit changed as the economy continued to rehab from the pandemic. In 2021, the benefit increased to a maximum of $7,000 per employee per quarter through Q3 2021, for a total of up to $21,000 per employee for the year (Originally for 4 quarters until Q4 was taken away in the American Rescue Plan)
Depending on your business and the area of the country where you work, the effects of the pandemic may have been longer lasting than others. The ERC can be used for any quarter between March 13, 2020 to Dec. 31, 2021.
Here’s how the maximum credit changes beginning with the CARES act and continuing with the American Rescue Plan.
| CARES Act | Relief Act | American Rescue Plan | |
|---|---|---|---|
| Effective Dates | March 20, 2020 – December 13, 2020 | January 1, 2021 – June 30, 2021 | July 1, 2021 – December 31, 2021 |
| Percentage of qualified wages eligible | Up to 50% of qualified wages for the year | Up to 70% of qualified wages per calendar quarter | Up to 70% of qualified wages |
| Maximum Credits | Up to $5,000 per employee in 2020 | Up to $7,000 per employee per quarter | Up to $7,000 per employee per quarter |
| W-2 Employee Requirement | 100 or less W-2 employees | 500 or less W-2 employees | 500 or less W-2 employees |
Does my company qualify for the ERC?
The Employee Retention Credit was originally earmarked for companies that met certain qualifications.
The Relief Act and the American Rescue Plan modified those qualifications to help more businesses take advantage of the program.
- Under the CARES act, any business or non-profit that meets the following criteria is eligible for the ERC:
- A full or partial shutdown of business operations because of government mandates or
Significant decline in gross receipts comparable to 2019
Did COVID affect my business enough to qualify?
The ERC uses two criteria to decide if a business can get a tax credit. The first stipulation depends on if a government mandate created a full or partial shutdown of your business. This could also mean that a supplier for your business was shut down or limited. For example, if you owned a restaurant affected by the government’s limited in-house seating or you had to close your restaurant for a specific amount of time, you would qualify for the ERC.
The ERC also says that if a business had a significant decline in gross receipts, it may also qualify for the tax credit. To qualify for the ERC in 2020, you had to have a decline at least 50%, compared to the same quarter of the previous year. In 2021, the ERC changed so that businesses only needed a 20% decline in gross receipts.
The Relief Act, which expanded the ERC to 2021, also expanded which businesses qualify for the ERC. In 2021, some governmental employers, including colleges, universities or businesses that provide medical or healthcare.
The ERC also specifies how many employees a company can have to qualify. The CARES act limited the ERC to companies with 100 or fewer W-2 employees. In 2021, the Relief Act expanded that requirement to 500 or less employees. For businesses over this threshold, the ERC can be used if a specific department had a significant impact from the pandemic.
Does my company qualify for the ERC?
If you started a business during the pandemic and don’t qualify for the ERC, you may be eligible as a recovery startup business. Businesses that qualify are eligible for the ERC during the third and fourth quarters of 2021.
To qualify, a business must meet these requirements:
- Established after February 15, 2020
- Have not had another business with revenue above $1 million per year
- Do not meet the criteria of the ERC
The Employee Retention Credit is great for companies across all industries, including
- Manufacturing
- Technology
- Construction
- Medical
- Real Estate
- Engineering
- Hospitality
- Food & Beverage
- Agriculture
- Professional Services
- E-commerce
- Retail
Precautions for filing for the ERC
The ERC created opportunities for businesses to gain valuable tax credits. It also allowed scammers to prey on companies seeking the ERC. Here are some simple things to look for to make sure you’re working with a reputable tax professional.
- Check to make sure the business was around prior to the ERC.
- Work with a Certified Public Accountant or a tax attorney
- Do they offer services other than ERC?
- Request a memorandum that correlates your tax situation with the tax code
What’s the process of getting the ERC?
Obtaining the ERC is straightforward.
Leaf Tax Consultants will help you determine eligibility for the ERC. Based on your eligibility, you can claim the ERC and file up until 2025.
Since you’ll be filing for an ERC for years you’ve already filed, you will have to file a payroll tax amendment for the quarters you wish to take the tax credit.
Since it can be complicated to calculate the ERC, you should seek guidance from an ERC tax specialist.
How to Find an ERC Tax Consultant
The Employee Retention Credit was created to help small businesses during the pandemic. While the ERC creates a great tax incentive, it has also been targeted by those trying to bilk money from the government. Fraud with the ERC can be rampant, and it is not always from the company. Scammers also created companies to help businesses understand and file for the ERC, but once they get their fee, they may leave the company high and dry.
This is why it is important to find a tax consultant who understands the ERC’s ins and outs. A qualified consultant will be able to ensure that your business qualifies, which periods of each year your business qualifies, and ultimately the total tax credit you will receive. From there, they can help you file the necessary forms to receive the tax credit.
If your company may qualify for the ERC, schedule a consultation with Leaf Tax Consultants. Companies have until 2025 to file for the credit, but you don’t need to leave that money in the government’s account instead of yours.
The Employee Retention Credit was created for any business or non-profit impacted by the COVID-19 pandemic. Companies could receive up to $7,000 per W-2 employee through the ERC if they experienced a government shutdown or a significant decrease in revenue.
The ERC has several different qualifications for small businesses. A tax consultant can help you understand those qualifications and ensure that your business meets the necessary things to receive the credit.
