Employee Retention Tax Credit for Service Companies
Small businesses have been hit hard by the pandemic, especially those in the service industry. With the challenges that come with staffing and keeping your business afloat, the Employee Retention Tax Credit (ERTC) is a lifeline that can help you save on taxes and retain your employees through these tough times.
If you own a service company and have been struggling to keep your business running during the pandemic, the ERTC can provide significant relief. This tax credit is designed to support businesses that have been affected by the pandemic and have experienced a decline in gross receipts or were fully or partially shut down due to COVID-19 restrictions. The ERTC can provide a refundable tax credit of up to $5,000 per employee for wages paid between January 1, 2021, and December 31, 2021.
In this article, we'll discuss the details of the Employee Retention Tax Credit for Service Companies, including eligibility criteria, how to claim the credit, and the benefits it can provide to your business. We'll also look at real-life examples of service companies that have utilized this credit to help you understand how it can be beneficial for your business.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit designed to help businesses that have been impacted by the COVID-19 pandemic. The credit is aimed to provide support to businesses that have experienced a decline in gross receipts or were fully or partially shut down due to COVID-19 restrictions and have kept their employees on the payroll.
How Does the ERTC Work?
According to the IRS website, the ERTC is a tax credit that is calculated based on wages paid to employees. Companies that are eligible for the credit can receive a refundable tax credit of up to $5,000 per employee. This credit can be claimed for wages paid between January 1, 2021, and December 31, 2021.
How is the ERTC Different from PPP?
The Treasury Department website are both designed to help small businesses impacted by the pandemic. However, there are some key differences between the two programs.
The PPP is a loan program that provides small businesses with funds to help cover payroll and other expenses. These loans can be forgivable if the business meets certain criteria, such as using the funds for eligible expenses and maintaining employee headcount. On the other hand, the ERTC is a tax credit that provides businesses with a direct reduction in their tax liability.
How to Claim the ERTC
Eligible businesses can claim the ERTC on their federal employment tax returns (Form 941). To claim the credit, businesses must meet certain criteria, including having a significant decline in gross receipts or being fully or partially shut down due to COVID-19 restrictions.
The IRS website provides detailed information on how to calculate the credit and how to claim it on your tax return. It's important to note that businesses cannot claim both the ERTC and the PPP for the same wages.
Eligibility for the Credit
To be eligible for the Employee Retention Tax Credit (ERTC), service companies must meet certain criteria. Here's what you need to know:
Significant Decline in Gross Receipts
According to the IRS website, businesses must have experienced a significant decline in gross receipts in order to be eligible for the ERTC. Specifically, businesses must have experienced a decline in gross receipts of at least 20% in a given quarter compared to the same quarter in 2019. Alternatively, businesses can compare their current quarter gross receipts to the same quarter in 2020.
Partial or Full Shutdown
Businesses that were fully or partially shut down due to COVID-19 restrictions are also eligible for the ERTC. This includes businesses that were forced to close entirely, as well as those that had to reduce their hours of operation.
Maximum Credit Amounts
The maximum credit amount that a business can receive is $5,000 per employee for wages paid between January 1, 2021, and December 31, 2021. According to Aprio, businesses can receive a credit of up to $7,000 per employee per quarter for the first two quarters of 2021.
Recovery Startup Businesses
Recovery startup businesses, which are defined as businesses that began operating after February 15, 2020, and have an average annual gross receipts of $1 million or less, can claim the ERTC for wages paid between October 1, 2021, and December 31, 2021. These businesses can claim a credit of up to $50,000 per quarter.
It's important to note that businesses cannot claim both the ERTC and the PPP for the same wages.
How to Claim the ERTC
If you believe your service company is eligible for the Employee Retention Tax Credit (ERTC), you can claim the credit on your federal employment tax returns (Form 941). Here's what you need to know:
Determine Your Eligibility
Before you claim the ERTC, you need to determine if your business is eligible. As we discussed earlier, businesses must have experienced a significant decline in gross receipts or been fully or partially shut down due to COVID-19 restrictions. For more information on eligibility, see section 3.
Calculate the Credit
To calculate the ERTC, you'll need to determine the amount of qualified wages paid to each eligible employee during the applicable period. According to Paychex, qualified wages include wages and health plan expenses paid to employees between January 1, 2021, and December 31, 2021.
Claim the Credit on Your Tax Return
Once you've determined your eligibility and calculated the credit, you can claim the ERTC on your federal employment tax return (Form 941). According to the IRS website, businesses can claim the ERTC on their quarterly tax returns for the applicable period.
Keep Records
It's important to keep detailed records of all the wages and health plan expenses that you're claiming for the ERTC. This includes records that show the number of full-time and part-time employees, the amount of qualified wages paid to each employee, and any other relevant information. By keeping detailed records, you'll be able to support your claim for the credit if you're ever audited by the IRS.
Consult with a Tax Professional
If you're unsure about how to claim the ERTC, or if you need help calculating the credit, it's a good idea to consult with a tax professional. A tax professional can help you navigate the complex rules and regulations surrounding the ERTC, and ensure that you're maximizing your credit to the fullest extent possible.
Tips for Maximizing the ERTC
The Employee Retention Tax Credit (ERTC) can be a valuable tool for service companies that have been impacted by the COVID-19 pandemic. Here are some tips for maximizing the credit:
Keep Detailed Records
As we mentioned earlier, it's important to keep detailed records of all the wages and health plan expenses that you're claiming for the ERTC. By keeping detailed records, you'll be able to support your claim for the credit if you're ever audited by the IRS.
Work with a Professional
Working with a tax professional can help you navigate the complex rules and regulations surrounding the ERTC, and ensure that you're maximizing your credit to the fullest extent possible. A tax professional can help you determine your eligibility, calculate the credit, and claim the credit on your tax return.
Review Your Payroll Tax Filing Status
According to Aprio, businesses that filed their payroll tax returns as “married filing jointly” may be eligible for additional ERTC credits. This is because the credit is calculated on a per-employee basis, and the “married filing jointly” status can result in higher credits for certain businesses.
Look for Other Tax Credits
In addition to the ERTC, there may be other tax credits available to service companies impacted by the COVID-19 pandemic. For example, the Paid Sick Leave Credit and the Paid Family Leave Credit can provide tax credits for businesses that offer paid leave to employees who are sick or quarantining. By taking advantage of these other tax credits, you can further reduce your tax liability and increase your cash flow.
Be Cautious of Third-Party Advice
The IRS website warns businesses to be cautious of third-party advice when it comes to claiming the ERTC. Some unscrupulous providers may offer to help businesses claim the credit, but then charge excessive fees or provide inaccurate information. To avoid these scams, businesses should work with a reputable tax professional and be wary of unsolicited offers for assistance.
Conclusion
The Employee Retention Tax Credit (ERTC) can be a valuable tool for service companies impacted by the COVID-19 pandemic. By providing tax credits to businesses that retain their employees, the ERTC can help service companies maintain their cash flow and avoid layoffs.
To be eligible for the ERTC, service companies must have experienced a significant decline in gross receipts or been fully or partially shut down due to COVID-19 restrictions. The credit can provide up to $5,000 per employee for wages paid between January 1, 2021, and December 31, 2021.
To claim the ERTC, service companies must determine their eligibility, calculate the credit, and claim the credit on their federal employment tax return (Form 941). It's important to keep detailed records of all the wages and health plan expenses that are being claimed for the credit, and to work with a tax professional if you're unsure about how to claim the credit.
By following the tips outlined in this article, service companies can maximize their ERTC credits and reduce their tax liability. If you believe your service company may be eligible for the ERTC, be sure to consult with a tax professional and explore all of your options for reducing your tax liability and increasing your cash flow.
Additional Resources
If you're looking for more information on the Employee Retention Tax Credit (ERTC), here are some additional resources to explore:
IRS Website
The IRS website provides detailed information on the ERTC, including eligibility requirements and how to claim the credit on your tax return. The website also includes frequently asked questions and other helpful resources for businesses.
Treasury Department Website
The Treasury Department website provides information on the various tax credit programs available to small businesses impacted by the COVID-19 pandemic, including the ERTC and the Paid Sick Leave Credit.
Aprio
Aprio services to businesses impacted by the COVID-19 pandemic. Their ERC experts can help businesses determine their eligibility for the credit, calculate the credit, and claim the credit on their tax return.
ERC Today
ERC Today. Their website includes frequently asked questions, eligibility requirements, and other helpful resources for businesses.
Paychex
Paychex is a provider of payroll and tax services for small businesses. They offer an ERTC Service that can help businesses determine their eligibility for the credit, calculate the credit, and claim the credit on their tax return.
Ready to Maximize Your ERTC Credits?
The Employee Retention Tax Credit (ERTC) can be a powerful tool for service companies impacted by the COVID-19 pandemic. By providing tax credits to businesses that retain their employees, the ERTC can help service companies maintain their cash flow and avoid layoffs.
If you believe your service company may be eligible for the ERTC, it's important to consult with a tax professional and explore all of your options for reducing your tax liability and increasing your cash flow. By keeping detailed records, working with a professional, reviewing your payroll tax filing status, and looking for other tax credits, you can maximize your ERTC credits and reduce your tax liability.
At ertcguy.com, we're committed to helping service companies navigate the complex world of tax credits and deductions. Check out our other great content to learn more about how you can reduce your tax liability and increase your cash flow.
Q & A
Who is eligible for the employee retention tax credit for service companies?
Service companies that have experienced a significant decline in gross receipts or were fully or partially shut down due to COVID-19 restrictions may be eligible for the ERTC.
What is the maximum amount of the employee retention tax credit for service companies?
Service companies can receive up to $5,000 per employee for wages paid between January 1, 2021 and December 31, 2021.
How can service companies claim the employee retention tax credit?
Service companies can claim the ERTC on their federal employment tax return (Form 941).
What records do service companies need to keep to claim the employee retention tax credit?
Service companies must keep detailed records of all the wages and health plan expenses that are being claimed for the ERTC.
What if service companies already received a PPP loan, can they still claim the employee retention tax credit?
Yes, service companies that received a PPP loan may still be eligible for the ERTC, but they cannot claim the credit for wages that were paid with PPP funds.
How does the employee retention tax credit for service companies differ from the paid sick leave credit?
The ERTC provides tax credits to businesses that retain their employees, while the Paid Sick Leave Credit provides tax credits for wages paid to employees who are sick or quarantining due to COVID-19.
