What is the Employee Retention Tax Credit?
The COVID-19 shutdown negatively affected a large percentage of businesses in the US. If your business hasn’t bounced back yet, our business consulting in NYC might be of help.
There’s a good chance that the pandemic hurt your business in some way, whether your sales went down, your doors were closed, or your traffic went down.
Even though the economy was bad, many companies were still able to keep their employees. Keeping your employees helps both them and your company by keeping it strong and ready to rebuild.
What is the employee retention tax credit?
The Employee Retention Tax Credit was established by the CARES Act of March 2020, which is a tax credit provided by the IRS.
The Employee Retention Tax Credit was then extended and expanded by the Relief Act of 2021 and the American Rescue Plan Act of 2021.
This is a tax credit that reimburses employers for a portion of their employees’ wages during the COVID-19 lockdown in 2020 and 2021. This is not a loan and must not be repaid. It was made to help American business owners who lost money because of the pandemic.
The ERC was a way for the United States government to encourage businesses to continue paying working Americans. It was like running an incentive program to reward your employees.
What does ERC mean?
Let’s look at a few key parts of the ERC that will help you figure out if your business is eligible.
One thing to remember is that the ERC is not a loan, but a tax credit. That means that it is used when you file your taxes to get you a refund.
This distinguishes it from the Paycheck Protection Program (PPP), which provided similar assistance to small and medium-sized businesses. The PPP was a loan backed by the Small Business Association to assist businesses in keeping their employees.
But if a business followed the rules of the PPP, the loan payment was likely forgiven in full.
The first question people often ask to see if they qualify for the ERC is if their business lost money during the COVID-19 shutdown. For your company to be eligible for the ERC, its quarterly gross sales must be at least 20% lower in 2020 and 2021 than they were in 2019. Companies that did not make a profit (or grew) in 2020 or 2021 are ineligible.
Let’s look at some of the key terms that affect whether or not your business qualifies for the tax credit and how much you’ll get from it.
Qualified Earnings
The Employee Retention Credit can only be used for qualified wages.
The problem is that qualified wages are defined differently depending on the size of your business. Companies with fewer than 100 employees and those with more than 100 employees are subject to different rules. That number of employees is based on how many people worked there in 2019, not in 2020 or 2021.
According to the IRS website, for businesses with fewer than 100 full-time employees, the rule is: “Those wages, including health care costs (up to $10,000 per employee), paid to any employee during the time operations were suspended or during the decline in gross receipts, regardless of whether or not its employees are providing services.”
According to the IRS website, the following is the rule for businesses with more than 100 full-time employees:
“Wages, including some health care costs (up to $10,000 per employee), paid to workers who aren’t doing their jobs because operations have stopped or because gross receipts have gone down. These employers can only count wages up to the amount the employee would have earned if they had worked the same number of hours in the 30 days preceding the period of economic hardship.
In 2020, businesses can claim up to 50% of a worker’s annual salary, up to a maximum of $10,000. So, in 2020, each worker could get $5,000 from their employer. Businesses could claim up to $10,000 per quarter in 2021 wages, which is 70% of a worker’s pay. As a result, you can deduct $7000 per employee per quarter.
In 2021, you could be eligible for the ERC from January 1 to October 1.
Permanent Workers
The next question is what a full-time worker looks like.
Section 4980H of the Internal Revenue Code says that a full-time worker is anyone who works more than 30 hours a week or 130 hours a month. As before, 2019 determines how many full-time employees you have.
This means that companies with employees who only work part-time (less than 30 hours a week) can’t use the Employee Retention Credit.
Businesses That Commonly Qualify
The employee retention credit can be used in a lot of different fields. The main barrier is the size of the company: in 2019, your business must have 500 employees or less.
Let’s break it down by industry so you can see who can apply and why they might qualify for an ERC.
1. Food & Beverage
Because of COVID-19, many states made it illegal to eat inside. Also, people ate and drank a lot less in 2020 and 2021 because they were afraid of the pandemic. During the COVID-19 shutdown, the food and drink industry was hurt by the lack of customers. Many restaurants had to close down or sell their business. Others had to change their hours or hire less people. Due to the bad economy, food and drink businesses that kept their staff could get the Employee Retention Credit.
2. Making something
Because of the COVID-19 pandemic, less building was done around the world in 2020. Those who could work had to deal with new safety rules and regulations, which can add more costs and make construction projects take longer. Taking these factors into consideration, construction business owners who were able to retain their employees may be eligible for the Employee Retention Credit.
3. Manufacturing
Because of the COVID-19 shutdown, there was a big drop in the manufacturing industry. During the first few months of the pandemic, about 1.4 million manufacturing jobs were lost in the U.S. When there were problems in the supply chain, there were delays, higher costs, and a lot of uncertainty in the manufacturing industry. Even though this industry has gotten back on its feet since the lockdown, employers who kept workers on the payroll in 2020 and 2021 can get the Employee Retention Credit.
4. Retail
The Coronavirus lockdown hurt retail stores. Customers couldn’t go to their stores, and problems in the supply chain may have affected the amount of goods they had on hand. This never-before-seen disruption to business made it hard for many stores to keep their doors open and keep their employees. Retail businesses that kept paying their employees will be able to get money from the ERC.
5. Hospitality
People’s ability to travel is important to the hospitality industry. During the COVID-19 lockdown, when most Americans were stuck inside and the borders between countries were shut, the hospitality industry lost money. Hotels had the lowest occupancy rates in history, and the whole industry saw big drops in revenue. The ERC is open to businesses in the hospitality field.
How do I make a request for the employee retention credit?
To be eligible for the Employee Retention Credit, your company must fall into one of the following categories:
• Business operations will be messed up after February 15, 2020, because of the coronavirus pandemic, and this will last for a long time. This includes companies that have been told by the government to stop working completely or partially, or that can’t work at their usual level because of the pandemic.
or
• A revenue decline. Most of your eligibility is based on what you did in 2019. To qualify, your business must have less than 500 employees in 2019. Also, your business’s quarterly gross sales must be at least 20% lower in 2020 and 2021 than they were in 2019. This is how you can prove that the Coronavirus lockdown hurt your business financially.
To determine whether your company is eligible for the Employee Retention Credit, examine your records from 2019, 2020, and 2021 to see if you meet the IRS’s requirements. You must have fewer than 500 full-time employees in 2019 and your quarterly gross sales must have decreased by 20% from the same quarter in 2018. If checking years of records sounds like a hell of a task, don’t worry! Ahad&Co’s CPA in NYC can help you out.
Note that people who work for themselves, such as freelancers filing personal taxes in NYC, can’t get the ERC. But companies that kept staff by letting them work from home can qualify.
If you’re not sure if you qualify, you can get help. Companies like ERC Assistant have quick and easy online forms that can tell you if you qualify.
How do I submit a request for the credit for employee retention?
If you are eligible for the ERC but haven’t gotten any money yet, you should fill out an application for the Employee Retention Credit.
Since you were no longer eligible for the ERC after October 2021 and the tax deadline for 2021 has already passed, you can only get the tax credit now by going back in time. Fill out and send in Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, which you can find on the IRS website.
Form 941-X will guide you through the various pieces of information you must provide, the majority of which is a detailed list of your wages and income tax. Form 941-X is lengthy and difficult to understand, so give yourself at least an hour to complete it or ask for assistance from an accountant in NYC.
You should begin the application process as soon as possible because it will take a long time to receive your money even after you submit your forms. The IRS says it takes six to ten months to get a response after Form 941-X is filed, but many business owners say it takes 16 months or longer.
