As a small business owner, it’s crucial to find ways to reduce expenses and increase revenue. One way to do this is by taking advantage of the Employee Retention Credit (ERC), a refundable payroll tax credit that can offer up to $26,000 per employee kept on your payroll.In this blog, we’ll explore what the ERC is, why it was created, and the benefits that the ERC has on small businesses. We’ll also provide a guide on how your business can determine if it’s eligible to claim the credit.
What is the Employee Retention Credit (ERC)?
If you’re struggling to keep up with your payroll taxes, the ERC could be the solution for you. The Employee Retention Credit is a payroll tax refund offered through the IRS that encourages and supports employers who retained existing employees throughout 2020 and the first three quarters of 2021.Eligible businesses can receive a refund of up to $5,000 for each employee on payroll for all of 2022 and up to $7,000 for each employee retained on the payroll of Q1 through Q3 of 2021.
Why was the ERC created?
The ERC was established as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) to help businesses get funded for lost revenue during the pandemic. The goal was to encourage employers to keep their employees on payroll, even if they were not working during COVID-19, to sustain the economy. Congress passed a $1.9 trillion relief bill to help businesses benefit. Initially, only a handful of businesses qualified for the Employee Retention Credit (ERC) under the Coronavirus Aid, Relief, and Economic Security (CARES) Act due to non-revenue decline. The IRS predicted that 70% of businesses would claim the Employee Retention Credit. However, the ERC is currently underutilized despite revisions made to the act which made the credit accessible to many more businesses. Alongside the CARES Act, the Families First Coronavirus Response Act (FFCRA) was also passed, which allows employers to qualify for both the ERC and FFCRA. As a result, both credits are available to eligible businesses. Over the past few years, the ERC has undergone several changes. The most recent change occurred in August when the IRS issued additional guidance for filing the credit. The government aims to encourage more businesses to file for the ERC by providing clarity on the filing process. This gives small businesses that are missing out the chance to gain access to these beneficial funds.
Benefits of the ERC for small businesses
The Employee Retention Credit (ERC) is a valuable resource for small businesses, particularly those that have been impacted by the COVID-19 pandemic. By offsetting or eliminating payroll taxes, the ERC can provide a significant boost to a business’s bottom line. It’s currently one of the largest refunds that businesses can receive. One of the major benefits of the ERC is that it’s considered tax-exempt income on your federal tax return. This can be a significant advantage for small businesses, especially those that are undergoing financial challenges. Another advantage of the ERC is that it can provide much-needed funding to businesses that have been impacted by the pandemic. This is particularly important for small businesses, which often have limited resources to weather economic downturns. By providing extra funding, the ERC can help businesses stay afloat and even grow during challenging times. If your business faced revenue decline during the COVID-19 pandemic, you might meet the eligible criteria to qualify for ERC. Take the time to look into your small business’s eligibility so you don’t miss out on funding you’re entitled to receive.
Is your small business eligible for the ERC?
The ERC is available to employers of any size, including tax-exempt organizations, and may also be available to tribes if they operate a trade or business. To qualify, employers 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. Employers can claim a credit of up to 70% of qualified wages paid to employees from March 13, 2020, to December 31, 2021. The maximum credit per employee is $5,000 for 2020 and $7,000 per quarter for 2021. Employers can also claim a credit for qualified health plan expenses.
How can businesses claim the ERC?
The ERC is a refundable credit, which means that if the credit exceeds the employer’s payroll tax liability, the excess can be refunded to the employer. The credit can be claimed on Form 941, Employer’s Quarterly Federal Tax Return, for the applicable calendar quarter. The IRS has provided guidance and resources to help employers understand and claim the ERC, including FAQs, a fact sheet, and a webinar. Employers should also consult with their tax advisors to determine their eligibility and maximize their credit. The ERC can be a lifeline for small businesses, providing them with the funds they need to stay afloat during difficult times. If your small business is eligible, filing for the ERC can significantly offset or even eliminate your payroll taxes, leading to increased revenue. The deadline to claim ERC for the 2020 tax year is approaching, so it’s important to take advantage of this opportunity while it lasts.
Our team of experts can help you navigate the complex rules and regulations surrounding the ERC and ensure that you receive the maximum amount of credit available to you. Contact us now to learn more and get started on the path to financial stability for your business.