Employee Retention Credit

What is it? Does my Business Qualify?

Taxes
May 2023

As a business, you may have heard about Employee Retention Credit and wonder if your business qualifies for it or what it entails. An Employee Retention Credit is a tax credit refunded to businesses that continued paying their employees during the pandemic and the shutdowns. These businesses should also have suffered revenue reductions because of the Covid-19 pandemic effects on the company.

Who qualifies for the ERC benefit

The benefits may vary and can go as high as $5,000 per employee in 2020 and $21,000 in 2021. A few factors determine whether you qualify for this amount, and one would be if a business suffered a partial shutdown due to government orders. These orders limited travel, commerce, and group meetings. A second factor that would qualify your business was whether you experienced a significant reduction in your gross receipt compared to the previous year, 2019. This is a significant revenue reduction caused by the pandemic. As an employer, you may qualify for the Employee Retention Credit. For taxable entities, the gross receipt for ERC will include total sales, dividends, interests, royalties, rents, and more. For non-taxable entities, this will include all the receipts for the taxable year, tax accounting methods for income recognition, proceeds for investments, and more.

What is the benefit comparison between small and large businesses?

The benefits of Employee Retention Credit for small and large organizations vary. Small businesses with 100 or fewer full-time employees count as eligible employees. For a company with 100 employees or above, these employees should have received payment without providing services due to the shutdown or the wage reduction. The company size is not the only determinant but there are other factors that determine the eligibility for receiving credit.

For a start-up business, you may not be required to show a decline in revenue to qualify for the credit. It works if your business started operations after February 15, 2020, and has generated less than $ 1 million in average revenue in the last three years. It is still possible for a business to apply for the Employee Retention Credit for 2020; they are open until April 15, 2024, and 2021 is open until April 15, 2025. However, It is advisable to apply earlier as the credit amount the company would receive significantly lowers with time.

The Employee Retention Credit is fully refundable, and once the business is given the amount, they are not expected to pay it back as it is not a loan. You must file an amendment form 941X (Quarterly Federal Payroll Tax Return) to apply for this. It is only filed for the quarters during which the company was an eligible employer.

After submission of ERC compensation, the business may need to amend their income tax returns as well as the personal income tax returns. However, this should not deter you from applying for the ERC because aside from having an additional tax due, it will be way lower than what you will get from the ER.

Conclusion

Employee Retention Credit is helpful to struggling businesses as it is a refundable tax credit. With the above insights, you should speak to a qualified and trusted consultant if you believe your company is eligible. This will reduce wrong advice and fraud instances. It is commonly said that you should ask the experts if you need more clarification. At Strategic Business Advisory & Tax we have CPA and taxation experts who are ready to provide advice and guidance with no upfront commitment.