Have you been paying employees who’ve been on the payroll for a while? If so, your small business may be eligible for the Employee Retention Credit (ERC). This is a federal program where you can earn a refundable tax credit just for paying your employees.
You probably have some questions: How do you know if your business is eligible for an employee retention credit? What counts as qualified wages under the Employee Retention Credit program? Is it the same as the Employee Retention Tax Credit (ERTC) program? How do you even go about getting the money?
Here are answers to some frequently asked questions we get at ClaimYourAid.com from small business owners just like you.
What Is the Employee Retention Credit?
Maybe you have heard about the credit, but you’re not 100 percent sure what it really is. For starters, there’s the name — once called the Employee Retention Tax Credit or ERTC, the name was later simplified to Employee Retention Credit (ERC).
With the credit, employers may be able to get credits of up to $5,000 for each full-time equivalent employee they retained from March 13, 2020, to Dec. 31, 2020, and up to $21,000 for each retained employee from Jan. 1, 2021, to September 30, 2021. Start-up businesses can also get up to $50,000 in credits for employees on the payroll in the fourth quarter of 2021. That can add up quickly.
Why Was It Created?
The credit first began in 2020 when Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). With job losses and unemployment skyrocketing, the Employee Retention Tax Credit was offered as an incentive to help offset the costs to small business owners who were still paying their workers. In that way it’s similar to the Paycheck Protection Program or PPP — both are federal government programs to help employers continue to employ (and pay) workers.
But there are a few key differences, so let’s break them down.
Employee Retention Credit vs. Paycheck Protection Program
Employee Retention Tax Credit
- Provides employers with a tax credit after they’ve already paid employees
- Still available for employers
Paycheck Protection Program
- Provided employers with money up-front to pay employees
- Sometimes referred to by business owners as the Payment Protection Program
- Money was available in the form of a government loan which could be forgiven
- Could be used to help fund payroll costs, including benefits, and could also be used to pay for mortgage interest, rent, utilities, worker protection costs related to COVID-19
- No longer available
How Does the Employee Retention Credit Work?
Just as the name implies, the ERC comes in the form of a credit on a business’ income taxes. Similar to a business deduction, a credit will reduce the amount that the business owner owes the government.
But this particular credit does even more than that. The Employee Retention Credit is what’s called a refundable tax credit. That means that even if the credits are more than you actually owe the government in income tax this year, the IRS will cut you a check for the difference. Say you owe $5,000 in income taxes, and you’ve got a $9,000 tax credit — the government would pay you $4,000.
The credit initially applied only to wages paid by businesses from March 2020 to December 2020, but that was expanded several times by Congress to apply to wages paid all the way through December 31, 2021. It was shrunk back down to September 30, 2021, but there’s an exception for some start-ups that may be able to qualify through December 2021.
The credit applies to what the IRS calls “qualified wages,” which covers not just the amount you paid the employee per hour or their salary but also group healthcare expenses and even tips your employees received on the job.
Some key considerations for employers when determining eligibility for the ERC
- Businesses are eligible if they had to fully or partially shut down due to a government mandate in response to the pandemic or if gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021).
- The Internal Revenue Service came out in November 2021 to let business owners know they may be eligible for the Employee Retention Tax Credit even if they received a Paycheck Protection Program disbursement. There is one catch, however: The credit will only apply to any qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness. Basically, you can’t double dip on the wages!
- Self-employed individuals cannot claim their own wages or wages of family members when applying for the ERC, but they can claim those of other employees.
The ERC is a complicated program but it can be very lucrative for small businesses. Still not sure how to claim the credit? We can help!
Click here to schedule your free consultation with a member of the ClaimYourAid.com team to find out if your business qualifies for the ERC or for other government grants, credits, or refunds.