The Employee Retention Credit (ERC) is a critical lifeline for businesses grappling with the economic impacts of recent events, like the COVID-19 pandemic. This refundable tax credit, aimed at helping businesses retain their workforce, can significantly alleviate financial burdens when utilized correctly. However, the process of claiming ERC can be intricate, making it crucial for businesses to understand its nuances. This blog aims to guide you through the best practices for successfully claiming the ERC, allowing your business to benefit optimally from this pivotal stimulus measure. Let’s explore how you can navigate this potentially game-changing opportunity effectively.
Established as a countermeasure to the COVID-19 pandemic, the Employee Retention Credit (ERC) serves as a completely refundable tax credit. Its primary goal is to motivate businesses to retain their employees on the payroll amidst challenging economic conditions or government-enforced operational restrictions.
Qualification for the ERC primarily hinges on two key criteria. Initially, your business should have witnessed a substantial reduction in gross receipts in any given quarter compared to the corresponding quarter in 2019. This reduction must amount to at least 20% for 2021 and 80% for 2020. Additionally, your business activities should have been either completely or partially halted due to a governmental directive pertaining to COVID-19.
The calculation of the ERC involves multiplying 70% (for 2021) or 50% (for 2020) of the qualifying wages paid to an employee during the eligible quarter. The maximum amount of qualifying wages per employee differs per year: $10,000 annually for 2020 and $10,000 per quarter for 2021.
It’s important to understand these basics, as they form the foundation for your claim. Proper comprehension of these elements will help ensure you receive the maximum benefit possible from the ERC.
Navigating the process of claiming the Employee Retention Credit can seem complex, but breaking it down into steps can help simplify the process.
- Determine Your Eligibility: The first step is to assess whether your business meets the eligibility criteria. This involves evaluating whether your operations were fully or partially suspended due to a COVID-19-related government order, or if your gross receipts for any 2021 calendar quarter declined by more than 20% compared to the same quarter in 2019.
- Calculate Your Potential ERC: Next, calculate the potential credit amount. This involves determining the qualifying wages paid to employees during the eligible quarters. For 2021, you can claim 70% of the first $10,000 of wages and health plan expenses paid to an employee in each quarter.
- How and When to Apply: The ERC is claimed by reporting your total qualified wages and the related health insurance costs for each quarter on your quarterly employment tax return (typically Form 941). If your business is eligible based on a decline in gross receipts, you can apply as soon as the quarter ends.
- Managing Your ERC Claim: Keep accurate and thorough records of wages and health plan expenses paid. If your credit exceeds your employment tax liability, the excess is refunded.
Navigating the process of claiming the Employee Retention Credit can be intricate. Here are some best practices that can ensure a successful claim:
- Accurate Record-Keeping: Keep meticulous records of your gross receipts for each quarter and compare them with corresponding quarters in 2019 to determine your eligibility. Similarly, maintain thorough records of all your payroll costs, including wages and health plan expenses, as these are required for calculating the credit.
- Understand the Interplay Between ERC and PPP: Businesses that receive Paycheck Protection Program (PPP) loans can also claim the ERC, but they can’t claim the credit on wages paid with forgiven PPP loan proceeds. Coordinate these programs carefully to maximize your total benefits.
- Seek Professional Help for Complex Situations: The intricacies of tax credits and potential interactions with other aid programs can be confusing. If your situation is complex, consider consulting with a tax professional or an accountant. They can provide guidance tailored to your specific circumstances.
- Stay Updated With IRS Guidelines: The IRS regularly updates guidelines on ERC as new legislation and clarifications come up. Regularly checking for updates can help ensure you’re fully leveraging the benefits and not missing out due to outdated information.
Remember, the ERC is a valuable tool designed to help businesses keep their employees and remain operational. Using these best practices can ensure a successful and beneficial claim.
Claiming the Employee Retention Credit (ERC) can be a lifeline for businesses, but several common mistakes can reduce its benefit or even lead to undesired complications. Here are three key pitfalls to avoid:
- Double-Dipping with PPP and ERC: Wages paid with forgiven PPP loan proceeds are not eligible for the ERC. Carefully coordinate the use of funds from these programs to maximize your overall benefit.
- Incorrectly Calculating Eligible Employees or Wages: For businesses with more than 500 employees, only wages paid to employees for not providing services are eligible for the ERC. Ensure that you accurately count your employees and correctly calculate eligible wages.
- Not Claiming the ERC When Eligible: Many businesses mistakenly believe they aren’t eligible for the ERC or that it’s not worth the effort. If you’re unsure about your eligibility, consult with a tax professional who can guide you through the process.
The Employee Retention Credit (ERC) presents a valuable opportunity for businesses to maintain their workforce during challenging economic times. By understanding its basic principles, following a systematic approach to claiming, adhering to best practices, and avoiding common mistakes, your business can fully leverage this beneficial provision. When in doubt, don’t hesitate to seek professional advice.