If you’re a small business owner or a member of a tax exempt organization, you may be interested in learning more about the ERC tax credit. It’s available to eligible businesses with fewer than 500 employees, and it can be a useful way to offset the costs of employee training and payroll services. But before you apply for the tax credit, make sure you know how to qualify.
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If your business has fewer than 500 employees, you might be eligible for the Employee Retention Credit (ERC) tax credit. It’s a refundable tax credit that rewards employers who continue to pay wages and maintain their employees during a period of pandemic. The CARES Act allows employers to claim the credit on qualified health plan costs, compensation costs, or qualified wages.
In the event of a pandemic, employers can claim up to $7,500 per employee for each of the first three quarters of 2021. However, there are restrictions to the ERC. For instance, if your company is closed for a week, you can’t claim the ERC for that period. You can only claim it if the gross receipts for your company have dropped by at least 20%.
Another reason that you may qualify for the ERC is if your company is a severely distressed business. A severely distressed business is one that has lost at least 90 percent of its gross receipts. To qualify, your business must have a gross receipts reduction of at least 20% during a single quarter.
Businesses that have suffered a measurable drop in gross receipts, such as those that are impacted by a government shutdown, can claim the ERC. Qualified wages refer to wages that are paid during a period of decline in gross receipts.
To be eligible, your business must have had less than 500 full-time employees during the year. Smaller businesses, however, can include all wages, including those that are not paid to employees. Larger employers can only count wages that are not being performed.
You can request the advance payment of the ERC if your business has fewer than 500 full-time employees. This can help reduce your payroll taxes immediately. Employers that wish to claim the credit must also file Form 7200 with the IRS.
The American Rescue Plan Act expanded the eligibility of the credit. It also created special requirements for rescue startups. These are outlined in Revenue Procedure 2021-33. Moreover, restaurants that have reduced their gross receipts by at least 20% during a quarter are allowed to claim the ERTC for the remaining quarter.
Employers using a PEO
If you’re using a PEO, you may be eligible to claim the Employee Retention Tax Credit. The credit is a refundable tax credit against certain employment taxes. It’s calculated based on wages paid to employees. Employers with fewer than 100 full-time employees are eligible to claim the credit, but only for wages earned after March 12, 2020.
To claim the ERC, you need to complete an IRS Form 941-X. Your PEO can help you complete this form accurately. You may also need to request that your PEO include any credits it claims in its consolidated Form 941-X filing.
However, before claiming the ERC, you’ll need to be sure to meet the other requirements for this credit. For example, you’ll need to maintain records to support your claim. This includes a detailed payroll report, listing all paychecks from March 13, 2020 to September 30, 2021.
Depending on your business, you may be able to include some or all of your employee wages in your ERC calculation. You may be able to include only wages paid to part-time employees, or you may be able to include health plan costs.
Unlike the FICA tip credit, the ERC does not need to be claimed individually. But it is the most generous credit available to small businesses.
The IRS has provided some helpful guidance on this subject. They even offer an ERC information gathering worksheet to assist qualifying small businesses in determining whether they qualify.
While the Employee Retention Tax Credit has been extended under the Relief Act of 2021, you should not assume that you qualify just because you are using a PEO. Be sure to follow all requirements and check with the IRS before filing your PEO’s consolidated Form 941-X. In addition, you may need some additional IRS guidance on your overall headcount.
Finally, the ERC is not for everyone. Self-employed individuals who employ others are not eligible. Similarly, household employers are not eligible.
Although the ERC is not for everyone, it is worth the effort to investigate your eligibility. With a little luck, you could find yourself eligible for this generous tax credit.
Employers with a significant drop in gross revenue
Employers who have suffered a significant drop in gross revenue can qualify for the Employee Retention Credit (ERC). The ERC is a refundable payroll tax credit that encourages employers to keep their employees on the job. If you’re not sure if you’re eligible for the credit, consult a certified public accountant.
There are several requirements that must be met in order for your business to qualify. The IRS has issued guidance on the various factors that you need to be aware of. But there are also some businesses that won’t be eligible. For example, you can’t claim the ERC if you’ve taken a PPP loan.
However, if you haven’t taken a loan, you may be eligible for the credit. To qualify for the ERC, your gross receipts must decrease by at least 50%. This amount is calculated as the difference between your gross receipts in the quarter that immediately preceded it and the corresponding quarter for the quarter in 2020.
Another rule is that you must have fewer than 100 full-time employees. That means you can’t claim the ERC on wages paid to all your employees, though you may be able to claim it on all of your part-time employees.
Additionally, if your business is affected by a governmental order, you may be able to take advantage of the ERC. You may also qualify for the credit if your business is severely financially distressed. However, you may have to file an amended income tax return to exclude the reduced amount of the credit.
Finally, to qualify for the ERC, your business must be affected by a “critical material disruption.” These types of events are characterized by an event that affects your ability to operate. A governmental order has a greater effect on your business than a group meeting or travel.
As an example, suppose ABC had gross receipts of $250,000 in the second quarter of 2020. However, the company was unable to open its doors because of a governmental order. Rather than close, the business is kept open by telework and other forms of remote work.
Eligibility for tax-exempt organizations
If you are an employer with a payroll of more than $500 thousand in 2020 or 2021, you may qualify for the Employee Retention Credit. It pays qualified wages to your employees if you have been ordered to suspend or terminate operations due to a government directive.
This credit is worth a significant amount of money. However, there are certain rules that you need to understand. You will also need to determine if your organization is eligible.
Before the CARES Act, governmental employers were excluded from the ERC. This was a problem because many nonprofit organizations were forced to temporarily cease their operations. In order to claim ERC, the employer must work at least 30 hours per week.
However, the American Rescue Plan Act expanded the definition of qualifying businesses. ERC now includes essential businesses that are essential to the economy and the general public. These include schools, hospitals, performing arts centers, and museums.
The Tax Relief Act of 2020 extended the ERC through 2021. This was also a part of the Consolidated Appropriations Act of 2021. With this expansion, more companies are now able to take advantage of the credit.
The IRS recently released updated FAQs regarding this topic. While these answers are helpful, they do not constitute legal authority. Consult an accountant or tax professional to determine if your organization is eligible.
Another issue that can affect your eligibility is your business’ size. Larger employers may be able to claim the ERC for a greater percentage of their gross receipts. On the other hand, small employers may be able to claim a smaller percentage of their gross receipts.
For a tax-exempt organization, the ERC can help you meet your payroll taxes. You can claim the credit each calendar quarter on your federal employment tax returns. During the 2020 and 2021 years, you can receive up to $26,000 per employee.
In addition to ERC, there are other relief options available for tax-exempt organizations. Your business should consult a tax professional to determine how you can best utilize these programs.