Was your small to mid-sized business impacted by the COVID-19 pandemic? If so, you may be able to benefit by claiming the Employee Retention Credit (ERC). The ERC is a tax credit you can get from the IRS for keeping your employees working during 2020 and 2021.
ARTICLE KEY POINTS:
- The Employee Retention Credit (ERC) is a tax credit available to small business owners who retained their employees during the COVID-19 pandemic.
- As a small business owner, the ERC can help offset payroll tax liabilities and provide your business with much-needed cash.
- The ERC can alleviate financial burdens for businesses impacted by the pandemic. You can still claim the 2020 and the 2021 ERC if your business is eligible.
Understanding the potential benefits of this credit is crucial, as it can provide your business with significant financial relief.
The Employee Retention Credit offers significant advantages to businesses, from boosting cash flow to retaining employees and mitigating financial stress.
Top Benefits of the Employee Retention Credit
If your business is eligible to claim the ERC, you can potentially receive up to $26,000 back from the IRS per employee. If that's not reason enough to apply, also consider the following benefits of employee retention credit:
1. Boosting Cash Flow
Cash flow is the lifeblood of any business. The ERC can provide your business with a cash influx by offsetting your payroll tax liabilities. Instead of waiting for your tax refund at the end of the year, your business can benefit from potentially receiving the funds on a quarterly basis. That's because the credit is claimed on quarterly payroll tax returns. (See our Guide on How to Apply for the Employee Retention Credit).
This can help maintain operations during economically challenging periods, fund important investments, or provide a financial buffer for future uncertainties. Keep in mind, however, that the IRS is currently facing a backlog of ERC claims. Though it may take some time to get your cash, the IRS Commissioner has committed to speeding up the process.
2. Retaining and Supporting Employees
One of the main goals of the ERC is to encourage businesses to retain their employees during times of hardship. Offering a financial incentive for keeping employees on the payroll reduces the burden associated with staff costs and incentivizes businesses to resist layoffs. This not only helps with job security, but also contributes to a healthier economy.
The ERC can provide your business with cash by offsetting your payroll tax liabilities.
3. Lowering Financial Stress and Operating Costs
The COVID-19 pandemic caused financial distress for many small businesses. Restaurants and bars, nail salons, bed and breakfasts and gyms were just some of the businesses that were forced to disrupt operations.
If you were the owner of one of these businesses, the ERC can help to alleviate the financial burdens caused. It also reduces your payroll tax liabilities, lowers operating costs. This can free up cash to use elsewhere, like investing in equipment, supplies and more.
It’s Not too Late: Businesses Can Still Claim the Employee Retention Credit
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4. Maximizing Tax Credits
Tax planning is vital when it comes to owning a business. Claiming the ERC can allow your business to maximize usage of available tax credits, potentially resulting in substantial savings. This is smart for any business seeking to optimize their tax position and directly improve their bottom line.
5. Getting Relief Beyond PPP
In 2021, the government expanded eligibility so that businesses that received PPP loan forgiveness can still qualify for and claim the ERC. Keep in mind, however, that you can't double-count qualified wages paid to employees for both programs.
To put it simply, if there are wages that were not included in your calculation of PPP loan forgiveness, those wages can potentially be used to qualify for the ERC. It's important to carefully evaluate how claiming the ERC may interact with other relief programs to avoid unintended consequences or potential penalties.
Navigating the Complexities of the ERC
Given the ERC has undergone multiple changes since first being introduced as part of the CARES Act, it's critical to understand eligibility requirements, the claim process and deadlines. Prior to applying, be prepared to:
- Determine if your business is eligible: Eligibility requirements depend on whether you're applying for the 2020 tax year versus the 2021 tax year. We've outlined the requirements in our Guide to Eligibility Requirements for the ERC.
- Gather necessary documentation: This can include the number of full-time employees your business kept on payroll in 2019, as well as proof of a significant decline in gross receipts.
- Calculate the credit amount you're eligible to receive: For most small businesses, the maximum amount for 2020 is $5,000 per employee, and $7,000 per employee for 2021. If you launched a business after February 15, 2020, you may be able to claim up to $50,000 per quarter.
- Complete the appropriate IRS forms: If you haven't yet filed quarterly tax returns for the years 2020 and 2021, fill out Form 941. If you already filed taxes for these quarters but forgot to claim the ERC, it's not too late. Simply amend your quarterly returns by filling out Form 941-X for each respective quarter.
If your small business doesn't have a dedicated accounting or HR department, you may find it challenging to navigate the requirements effectively. This may require consultation with a tax professional or ERC expert who can help you understand the most up-to-date rules.
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The Employee Retention Credit offers significant advantages to businesses, from boosting cash flow to retaining employees and mitigating financial stress. By maximizing this tax credit, businesses can achieve a lower operating cost base and better financial health, allowing them to navigate challenging times more resiliently. With a clear understanding of the ERC's benefits, businesses can unlock its potential to impact their operations and financial stability positively.