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When the COVID-19 pandemic began and businesses were forced to shut down operations, Congress passed programs to provide financial assistance to businesses. One of these programs was the Employee Retention Credit (ERC).
ERC provides eligible employers with payroll tax credits for wages and health insurance paid to employees. However, with the signing of the Infrastructure Investment and Jobs Act in November 2021, the ERC program came to an end.
Despite the end of the program, companies still have the option of applying for an ERC retrospectively for up to three years. Here’s how the program works and how you can claim this credit for your business.
What is ERC?
Originally available from March 13, 2020 to December 31, 2020, the ERC is a refundable payroll tax credit created under the CARES Act. The purpose of the ERC was to encourage employers to keep their employees on the payroll during the pandemic.
Eligible employers and borrowers taking out loans under the Paycheck Protection Program may claim up to 50% of eligible wages, including eligible medical insurance expenses. The Consolidated Appropriation Act (CAA) expanded ERC. Employers who qualify in 2021 can claim a credit of 70% of eligible salary.
Who is eligible for ERC?
Whether or not you qualify for the ERC depends on the period for which you are applying. To qualify for 2020, you must operate a business or tax-exempt organization that has partially or fully closed due to COVID-19. You must also demonstrate that you have experienced a significant drop in revenue – less than 50% of comparable gross revenue as of 2019.
If you’re trying to qualify for 2021, you’ll need to show that your gross earnings have decreased by 80% compared to the same period in 2019. If you weren’t in business in 2019, you can compare your gross earnings to 2020.
The CARES Act prohibits the self-employed from claiming ERC for their own wages. You cannot claim wages for specific people related to you, but you can claim a credit for wages paid to employees.
What are qualifying wages?
What counts as a qualifying salary depends on the size of your business and the number of employees you have. There is no size limit to be eligible for an ERC, but small and large companies are treated differently.
If you had more than 100 full-time employees in 2020 in 2019, you can only claim salaries for the employees you kept but didn’t work. If you have fewer than 100 employees, you can claim everyone regardless of whether they are working or not.
For 2021, the limit was raised to 500 full-time employees in 2019, giving employers plenty of leeway in what to draw on the loan. All wages subject to FICA tax qualify, and you may include qualifying healthcare expenses in the tax credit calculation.
These earnings should be paid out between March 13, 2020 and September 30, 2021. However, restructuring startups must claim the loan by the end of 2021.
How to apply for a tax credit
Even though the program ends in 2021, companies still have time to apply for the ERC. When you file your federal tax return, request this tax credit by completing Form 941.
Some companies, particularly those who received loans from the Paycheck Protection Program in 2020, incorrectly believed that they did not qualify for an ERC. If you have already filed your tax return and now qualify for an ERC, you may apply retrospectively by completing the Employer’s Adjusted Quarterly Federal Tax Return (941-X).
As the tax laws surrounding ERCs have changed, it can be confusing for many business owners to determine eligibility. It is also difficult to determine which are worthwhile and which are not. This process becomes even more difficult when you own multiple businesses. And if you fill out IRS forms incorrectly, it can delay the whole process.
If you are having trouble applying for the ERC, it may help to consult a tax advisor. This person can help ensure you are on the right track. You can also check out the IRS list of frequently asked questions about ERCs to learn more.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.
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