As a business owner, you’ve likely felt the impact of the COVID-19 pandemic on your bottom line. The good news is that there are government assistance programs available to help keep you afloat during these challenging times. One such program is the Employee Retention Credit (ERC), a refundable tax credit designed to encourage businesses to keep employees on their payroll.
In this article, we’ll explore everything you need to know about the ERC application process in 2021. We’ll start with a brief explanation of the credit and why it is so important for businesses affected by the pandemic. Then, we’ll dive into the eligibility requirements, how to claim the credit, and recent changes to the program. Finally, we’ll discuss the benefits of the ERC and why you should consider applying for it.
Whether you’re a small business owner or the CEO of a large corporation, the ERC could be the lifeline you need to weather the storm and emerge stronger on the other side. So let’s get started and explore how you can take advantage of this valuable program.
Eligibility Requirements for the Employee Retention Credit
Definition of Eligible Employers
To be eligible for the ERC, you must be an employer that was either partially or fully suspended due to government orders related to COVID-19, or experienced a significant decline in gross receipts in 2020 or 2021. This decline must be greater than 50% of gross receipts in a quarter compared to the same quarter in the previous year.
Eligible employers include businesses of any size, including tax-exempt organizations. However, if you received a Paycheck Protection Program (PPP) loan, you may not be eligible for the ERC.
Impact of Government Assistance on Eligibility
If you received any government assistance, such as a PPP loan or other COVID-19 relief program, it may impact your eligibility for the ERC. Specifically, if you received a PPP loan, you may not be eligible for the ERC. However, if you did not receive a PPP loan, you may still be eligible for the ERC.
Calculation of Qualified Wages
Qualified wages are wages paid to employees during the eligibility period, which is from March 13, 2020, to December 31, 2021. The amount of qualified wages eligible for the ERC varies based on the number of employees you had in 2019.
For businesses with an average of 500 or fewer full-time employees in 2019, all wages paid during the eligibility period are qualified wages. For businesses with an average of more than 500 full-time employees in 2019, only wages paid to employees who were not working during the eligibility period are qualified wages.
It’s important to note that qualified wages are capped at $10,000 per employee per quarter. This means that the maximum credit per employee is $7,000 per quarter, for a total of $28,000 per employee for the entire eligibility period.
How to Claim the Employee Retention Credit
Explanation of Form 941
Form 941 is a quarterly tax form that employers use to report payroll taxes to the IRS. To claim the Employee Retention Credit, you’ll need to fill out Line 11 of Form 941. This line is specifically for the ERC, and it allows you to claim the credit for qualified wages paid during that quarter.
Step-by-step guide to claiming the credit
To claim the ERC, you’ll need to follow a few simple steps. First, determine if you’re eligible to claim the credit based on the criteria outlined in Section II of this article. Then, calculate your qualified wages for the quarter and complete Line 11 of Form 941 accordingly.
Next, you’ll need to reduce any deposits of payroll taxes that you would normally make for that quarter by the amount of the ERC. If the credit exceeds your payroll tax liability for the quarter, you can request a refund by filing Form 941-
Deadlines for filing Form 941
Form 941 is due on the last day of the month following the end of each quarter. For example, the deadline for Q1 (January-March) is April 30th. It’s important to file Form 941 on time to avoid penalties and interest charges.
Keep in mind that if you’re claiming the ERC for a previous quarter, you’ll need to file an amended Form 941-X for that quarter. The deadline for filing an amended return is generally two years from the date you paid the taxes that you’re correcting.
Changes to the Employee Retention Credit in 2021
The ERC has undergone some significant changes in 2021, making it even more attractive for businesses impacted by the pandemic. Here are some of the key updates to the program:
Extension of the ERC until December 31, 2021
Originally set to expire on June 30, 2021, the ERC has been extended until the end of the year. This means that eligible businesses can continue to claim the credit for each calendar quarter until December 31, 2021.
Increase in credit amount from 50% to 70% of qualified wages
Perhaps the most significant change to the ERC in 2021 is the increase in the credit amount. Previously, eligible employers could claim a credit equal to 50% of qualified wages. However, this has been increased to 70% of qualified wages, significantly increasing the financial benefit for businesses.
Expansion of eligibility criteria
The ERC eligibility criteria have also been expanded in 2021, making the credit available to more businesses. For example, the definition of eligible employers has been expanded to include recovery startup businesses, and certain governmental entities are now eligible. Additionally, businesses that experienced a decline in quarterly gross receipts of at least 20% (rather than the previous 50% threshold) are now eligible for the credit.
Overall, these changes make the ERC an even more attractive option for businesses impacted by the pandemic. If you’re eligible, be sure to take advantage of this valuable program to help keep your business afloat during these challenging times.
Benefits of the Employee Retention Credit for Employers
The ERC offers numerous benefits for eligible employers, from financial incentives to increased employee retention. Let’s explore some of the key advantages of the program.
Financial Advantages of the ERC
One of the most significant benefits of the ERC is the financial incentives it provides to businesses affected by the COVID-19 pandemic. The credit is worth up to 70% of qualified wages paid to an employee, up to a maximum credit of $28,000 per employee. This can help offset the cost of retaining employees during a time of economic uncertainty and help businesses stay afloat.
In addition, businesses can claim the ERC as a refundable tax credit, meaning that they can receive a cash refund if the credit exceeds their tax liability. This can provide much-needed liquidity for struggling businesses and help them stay afloat during challenging times.
Impact on Employee Retention
Another significant advantage of the ERC is its impact on employee retention. By providing financial incentives for businesses to keep employees on their payroll, the ERC can help reduce layoffs and furloughs, keeping businesses and employees on more stable footing.
This can have a ripple effect throughout the economy, as employees who are able to keep their jobs are more likely to continue spending money and supporting other businesses. This can help reduce the overall impact of the pandemic on the economy and help promote a quicker recovery.
Comparison to Other COVID-19 Relief Programs
While there are numerous COVID-19 relief programs available to businesses, the ERC stands out as one of the most attractive options. Unlike other programs, such as the Paycheck Protection Program (PPP), the ERC does not require businesses to repay the funds they receive. Instead, it provides a tax credit that can be used to offset the cost of retaining employees.
This makes the ERC a more flexible option for businesses that may not need a loan, but still require financial assistance to stay afloat during the pandemic. Additionally, the ERC can be used in conjunction with other relief programs, allowing businesses to maximize the benefits they receive.
Overall, the benefits of the ERC for eligible employers are numerous and significant. By providing financial incentives for businesses to retain employees, the ERC can help reduce layoffs, promote economic stability, and support a quicker recovery from the pandemic.
Conclusion
In conclusion, the Employee Retention Credit is a valuable program that can help businesses affected by the COVID-19 pandemic stay afloat and retain their employees. With recent changes to the program, including an extension until December 31, 2021, an increase in credit amount, and expanded eligibility criteria, now is the time to take advantage of this credit.
As we’ve discussed, the application process for the ERC can be complex, but with a little guidance and the right information, you can successfully navigate the process and claim the credit you’re entitled to. Remember to check your eligibility, calculate your qualified wages, and file Form 941 on time to avoid penalties.
The benefits of the ERC are numerous, from the financial advantages to the positive impact on employee retention. By taking advantage of this program, you can help ensure the success of your business and the well-being of your employees.
So don’t wait any longer. If you’re eligible for the Employee Retention Credit, start the application process today and take the first step towards securing a brighter future for your business.