Employee Retention Tax Credit for Startups
Small businesses have been hit hard by the COVID-19 pandemic, with many struggling to keep their doors open due to decreased revenue and increased expenses. To help alleviate some of the financial burdens, the American Rescue Plan has extended the Employee Retention Tax Credit (ERTC) to small businesses through December 2021. Recovery startup businesses can claim the credit in Q4 2021.
The ERTC is a refundable tax credit for businesses that paid employees during the pandemic or had significant declines in gross receipts. It is designed to encourage businesses to keep their employees on the payroll, even if the business is not operating at full capacity. In this article, we will explore the eligibility requirements for the ERTC, how much you can claim, and how to claim the credit.
Importance of the Tax Credit for Startups
Startups are often at a disadvantage when it comes to cash flow and revenue, and the pandemic has only made it more difficult for them to survive. The ERTC can help startups keep their doors open and retain their employees, which is crucial for their long-term success. By claiming the tax credit, startups can reduce their tax liability and reinvest the savings back into their business. The credit can also help startups attract and retain talented employees, which is essential for growth and innovation.
Brief Overview of the American Rescue Plan
The American Rescue Plan is a $1.9 trillion economic stimulus package that was signed into law on March 11, 2021. It includes a range of measures to help individuals and businesses recover from the pandemic, including direct payments to individuals, extended unemployment benefits, and tax credits for small businesses. The ERTC is one of the tax credits included in the plan and has been extended through December 2021.
Eligibility Requirements for the Employee Retention Tax Credit
To claim the ERTC, businesses must meet certain eligibility requirements. The following are the criteria businesses must meet to be eligible for the credit:
Qualifying Businesses
The ERTC is available to all businesses, including tax-exempt organizations, that have experienced one of the following:
- A full or partial suspension of operations due to government orders related to COVID-19
- A significant decline in gross receipts, which is defined as a decline of 20% or more in gross receipts compared to the same quarter in 2019
According to [IRS], eligible employers can claim the credit on their tax returns, and recovery startup businesses can claim it in Q4 2021. Employers should be cautious of third-party advice, and penalty relief is available for claims related to the credit.
Eligibility Criteria for Recovery Startup Businesses
New businesses that started after February 15, 2020, may be eligible for the ERTC as a recovery startup business. To qualify as a recovery startup business, the following conditions must be met:
- Annual gross receipts of $1 million or less
- One or more employees (excluding owner-operators and family members)
- Business was not in existence for the entire 2019 calendar year
According to [ERCToday.com], a qualifying “recovery startup business” must have annual gross receipts of $1 million or less and employ one or more employees. The ERC does not require repayment or spending in a certain way and can be claimed retroactively by filing form 941-X. Tax professionals can assist businesses in maximizing their ERC.
Annual Gross Receipts Requirement
Businesses must have experienced a significant decline in gross receipts to be eligible for the ERTC. Gross receipts are defined as the total amount of revenue a business receives from all sources, including sales, services, and interest. Businesses can compare their 2020 gross receipts to their 2019 gross receipts to determine if they meet the eligibility criteria.
According to [Treasury.gov], the Employee Retention Credit allows businesses to offset their current payroll tax liabilities by up to $7,000 per employee per quarter, while the Paid Leave Credit offers dollar-for-dollar tax credits equal to wages of up to $5,000 for businesses that offer paid leave to employees who may take leave due to illness, quarantine, or caregiving. The ERC is available for all four quarters of 2021, with a maximum benefit of $28,000 for the full year.
W-2 Employee Requirement
Businesses must have at least one W-2 employee to be eligible for the ERTC. This excludes owner-operators and family members who are not considered employees.
Exclusions
Businesses that received a Paycheck Protection Program (PPP) loan are not eligible for the ERTC. Businesses that received a Shuttered Venue Operators Grant (SVOG) can claim the ERTC, but the amount of the grant will be deducted from the amount of the credit.
According to [KruzeConsulting], business owners should consult with a CPA to determine if they qualify for the credit and avoid falling for fraudulent offers. Improperly claiming the credit could result in penalties and interest.
How Much Can Businesses Claim Through the Employee Retention Tax Credit?
The amount businesses can claim through the ERTC depends on several factors, including the number of employees and the amount of qualified wages paid during the eligible quarter.
Calculation of the Credit
The ERTC is calculated as a percentage of qualified wages paid to employees during eligible quarters. According to [IRS], the credit is equal to 70% of qualifying wages paid to employees, up to a maximum of $10,000 per employee per quarter. This means that businesses can claim a credit of up to $7,000 per employee per quarter.
Maximum Benefit
The maximum benefit businesses can claim through the ERTC is $28,000 per employee for the full year. This is based on a credit of $7,000 per employee per quarter for all four quarters of 2021.
Qualified Wages
Qualified wages are the wages paid to employees during eligible quarters. According to [Lendio], eligible wages include:
- Wages paid from March 13, 2020, to December 31, 2021
- Health plan expenses
- Employer contributions to defined benefit plans
Eligible Quarters
Businesses can claim the ERTC for all four quarters of 2021. According to [Treasury.gov], the credit is available for the first two quarters of 2021 for businesses that experienced a significant decline in gross receipts. The credit is available for all four quarters for businesses that experienced a full or partial suspension of operations due to government orders related to COVID-19 or a significant decline in gross receipts.
Claiming the Credit
Businesses can claim the ERTC on their quarterly employment tax returns, using Form 941. The credit can be claimed against the employer's share of Social Security tax. If the credit exceeds the employer's Social Security tax liability, the excess will be refunded.
According to [Lendio], startups launched after February 15, 2020, may qualify for the ERTC under the American Rescue Plan of 2021. Recovery startup businesses meeting certain criteria can claim the credit retroactively for both 2020 and 2021. Eligible businesses can receive a credit of up to $7,000 per worker, per quarter, with a maximum of $50,000 for the final two quarters of the year.
How to Claim the Employee Retention Tax Credit
Businesses can claim the ERTC on their quarterly employment tax returns, using Form 941. Here are the steps businesses can take to claim the credit:
Step 1: Determine Eligibility
The first step in claiming the ERTC is to determine eligibility. Businesses must have experienced a significant decline in gross receipts or a full or partial suspension of operations due to government orders related to COVID-19. Recovery startup businesses must meet certain criteria to be eligible for the credit.
According to [KruzeConsulting], business owners should consult with a CPA to determine if they qualify for the credit and avoid falling for fraudulent offers. Improperly claiming the credit could result in penalties and interest.
Step 2: Calculate the Credit
The next step is to calculate the ERTC. The credit is equal to 70% of qualifying wages paid to employees, up to a maximum of $10,000 per employee per quarter. Businesses can claim a credit of up to $7,000 per employee per quarter.
Step 3: Claim the Credit
Businesses can claim the ERTC on their quarterly employment tax returns, using Form 941. The credit can be claimed against the employer's share of Social Security tax. If the credit exceeds the employer's Social Security tax liability, the excess will be refunded.
Step 4: Keep Records
Businesses should keep records of the qualified wages and the number of employees retained during eligible quarters. According to [Treasury.gov], businesses must retain all records related to the ERTC for at least four years after the date the tax becomes due or is paid, whichever is later.
Step 5: Seek Professional Help
Claiming the ERTC can be complex, especially for recovery startup businesses. Tax professionals can assist businesses in maximizing their credit and avoiding potential penalties and interest.
According to [ERCToday.com], the ERC does not require repayment or spending in a certain way and can be claimed retroactively by filing form 941-X. Tax professionals can assist businesses in maximizing their ERC.
Conclusion
The Employee Retention Tax Credit is a valuable tax credit that can help businesses retain employees and recover from the effects of the COVID-19 pandemic. By understanding the eligibility requirements, calculating the credit, and following the correct procedures to claim it, businesses can maximize their benefit from the credit. Seeking professional help from a tax professional can also help businesses navigate the complex rules and avoid potential penalties and interest.
Common Mistakes to Avoid When Claiming the Employee Retention Tax Credit
While the Employee Retention Tax Credit can be a valuable tool for businesses, there are some common mistakes that businesses should avoid when claiming the credit. Here are some of the most common mistakes:
Mistake #1: Not Understanding Eligibility Requirements
One of the most common mistakes businesses make when claiming the ERTC is not understanding the eligibility requirements. Businesses must have experienced a significant decline in gross receipts or a full or partial suspension of operations due to government orders related to COVID-19. Recovery startup businesses must meet certain criteria to be eligible for the credit.
According to [IRS], businesses should be cautious of third-party advice and penalty relief is available for claims related to the credit.
Mistake #2: Improperly Calculating the Credit
Another common mistake businesses make is improperly calculating the ERTC. The credit is equal to 70% of qualifying wages paid to employees, up to a maximum of $10,000 per employee per quarter. Businesses can claim a credit of up to $7,000 per employee per quarter.
Mistake #3: Failing to Keep Adequate Records
Businesses should keep records of the qualified wages and the number of employees retained during eligible quarters. According to [Treasury.gov], businesses must retain all records related to the ERTC for at least four years after the date the tax becomes due or is paid, whichever is later.
Mistake #4: Not Seeking Professional Help
Claiming the ERTC can be complex, especially for recovery startup businesses. Tax professionals can assist businesses in maximizing their credit and avoiding potential penalties and interest.
According to [Lendio], businesses should work with a tax professional to ensure they are correctly claiming the credit and avoiding common mistakes.
Conclusion
By understanding the common mistakes businesses make when claiming the ERTC, businesses can avoid penalties and maximize their benefit from the credit. Seeking professional help from a tax professional can also help businesses navigate the complex rules and avoid potential penalties and interest.
Wrap Up
The Employee Retention Tax Credit can be a valuable tool for businesses to retain employees and recover from the effects of the COVID-19 pandemic. By understanding the eligibility requirements, calculating the credit, and following the correct procedures to claim it, businesses can maximize their benefit from the credit. Seeking professional help from a tax professional can also help businesses navigate the complex rules and avoid potential penalties and interest.
At [ertcguy.com], we provide valuable information and resources to help businesses navigate the world of business taxes and regulations. Check out our blog for more great content on tax credits, deductions, and other tax-related topics.
Thank you for reading, and we hope you found this article helpful.
Sources:
- [IRS]
- [Treasury.gov]
- [Lendio]
FAQ
Who is eligible for the Employee Retention Tax Credit for startups?
Businesses that have experienced a significant decline in gross receipts or a full or partial suspension of operations due to COVID-19.
What is the maximum credit that a startup can receive from the Employee Retention Tax Credit?
Startups can receive a credit of up to $7,000 per worker, per quarter, with a maximum of $50,000 for the final two quarters of the year.
How can startups claim the Employee Retention Tax Credit?
Startups can claim the credit on their tax returns or by filing Form 941-X to claim the credit retroactively.
What is a recovery startup business?
A recovery startup business is a new business that started after February 15, 2020, with annual gross receipts of $1 million or less and one or more employees.
How can startups ensure they are properly claiming the Employee Retention Tax Credit?
Startups should work with a tax professional to ensure they are correctly claiming the credit and avoiding common mistakes.
What happens if a startup improperly claims the Employee Retention Tax Credit?
Improperly claiming the credit could result in penalties and interest. Businesses should consult with a CPA to determine if they qualify for the credit and avoid falling for fraudulent schemes promising tax savings.
