After 13+ months, the COVID-19 global pandemic is still presenting small businesses with new and often unexpected challenges. As a result, the U.S. government has stepped in to provide further tax legislation and financial relief vehicles to help small businesses continue to navigate the seemingly endless (and constantly changing) economic terrain. One of the most significant relief resources for smaller operations is the Employee Retention Credit or ERC.
First established in the CARES Act, the ERC, like so many other tax credit programs, has undergone extensive changes, revisions, and expansions. These changes were first seen under the Consolidated Appropriations Act, 2021, and then further developments were updated under the American Rescue Plan Act.
What You Need To Know About The Employee Retention Credit
Most business owners already know firsthand that most COVID-19 tax law is complex — and the expanded ERC legislation is no exception. Understanding what the credit is, how it works, who is eligible, and how to do the math on this program can help you better understand if the ERC is the right option for your organization. Some frequently asked questions about the ERC include:
What is the ERC Credit?
The Employee Retention Credit is a refundable tax credit available to business owners who meet specific criteria outlined in the Consolidated Appropriations Act, 2021. Eligible employees of this tax incentive may:
- Receive a credit that totals up to 70% of each employee’s qualifying wages for the tax year 2021
- Potentially include group health expenses as qualifying wages, regardless of whether other employee wages were paid
- Potentially include health plan costs as qualifying wages, regardless of whether other employee wages were paid
Who Is Eligible For the Credit?
Two essential factors largely determine employer eligibility for the ERC. To qualify, at least one of these factors must be relevant in the calendar quarter the taxpayer utilizes the credit:
- The business must undergo a full or partial closure due to a government order
- The business must demonstrate a significant decrease in gross receipts
Can Business Owners Who Received a PPP Loan Claim the ERC?
Yes. Many taxpayers assume that they aren’t eligible for the ERC credit if they’ve received a PPP loan. However, new legislation allows PPP recipients to also claim the ERC, as long as it’s applied to wages not forgiven as part of the Payback Protection Program.
How is the Credit Calculated?
The Employee Retention Credit for 2021 is 70% of qualified employee wages, with a cap at $10,000 per quarter. As a result, the maximum credit available is $7,000 per employee per quarter. The credit is applied to the business owner’s portion of the worker’s Social Security taxes — and is fully refundable. The credit is considered an overpayment; you’ll receive a refund in the amount that exceeds your Social Security tax liability for that quarter.
Contact Acena Consulting Today
The best way to optimize the ERC tax credit is to consult with a licensed tax professional. Contact Acena Consulting to learn more about using this tax credit to offset your small business’ tax liability.