How the Employee Retention Credit Works

Carroll Fadel
July 31, 2023

Explanation of the Employee Retention Credit

Principal Ideas:

●      The CARES Act included theEmployee Retention Credit (ERC), which has been extended for most enterprisesthrough the end of the third quarter of 2021.

●      As of 2020, the ERC is set at50% of eligible salaries up to $10,000. In 2021, that number rose to 70%.

●      In 2020, businesses candeduct up to $5,000 per employee, rising to $21,000 in 2021, or $7,000 peremployee, every quarter.

●      For a company to qualify, itsgross sales must have dropped by at least 50% in 2020, or by 20% in 2021,compared to the same quarter in 2019

●      What to expect from the ERCapplication process:

1.     Form 941-X must have precisecomputations

2.     Justify your reasoning.

3.     Acquire All Necessary Records

4.     The timeliness ofapplications is of the essence.

5.     For your credit, a papercheck will be provided.

6.     The credit limitations applyto all businesses.

7.     The credit is tax-free, butyou might have to file an amended tax return.

8.     Your investment in the ERC isrisk-free and entirely refundable

●      Consult with a seasoned ERCprofessional for assistance with this intricate procedure.

In early 2020, the government moved in to helpstabilize the economy for citizens and companies alike. Many businesses wereable to survive the wave of record layoffs, company closures, and joblessclaims because of government assistance programs including tax credits anddisaster relief loans.

The Coronavirus Aid, Relief, and Economic Security Act(CARES Act) of March 2020 established the Employee Retention Credit (ERC). Thecredit served as a deduction against payroll taxes with the intention ofencouraging businesses to retain their workers on the payroll. Originally setto expire at the end of 2020, the credit was extended beyond 2021 because ofnew laws. Even though the ERC is over, there is still time for qualifyingbusinesses to submit claims for the credit.

The ERC eventually grew to be the government's largeststimulus package. If your company was affected by the COVID-19 epidemic, youmay still be entitled for up to $26,000 per affected employee. This manual willexplain the Employee Retention Credit and the steps involved in applying forand receiving your credit.

The Employee Retention Credit: How Does It Work?

The ERC provides a significant opportunity forbusinesses to get a payroll tax credit to help mitigate the impact of thepandemic on their operations. Companies that were forced to shut down orsuffered financial losses as a result of the epidemic are eligible. The ERC canbe redeemed for cash at any time. That's right; any credit balance remainingafter paying off your tax bill is yours to keep as cash.

For salaries paid in 2020 between March 12 andDecember 31, you can claim a credit equal to 50% of up to $10,000 per employee.Each employee is eligible for a credit equal to 70% of up to $10,000 insalaries received during the first three quarters of 2021. To put it anotherway, in 2020 you may be eligible for up to $7,000 in payroll tax credits foreach employee, and in 2021 you may be eligible for up to $21,000 in payroll taxcredits for each employee.

Most companies' ERCs expired on September 30, 2021,thus you may only use the first three-quarters of that period. However,fledgling enterprises involved in the recovery process can also take credit forthe previous three months. This category includes companies that have less than$1 million in yearly gross sales and a start date after February 15, 2020.

When filing your original quarterly tax returns, youmight have included a claim for the ERC on Form 941, Employer's QuarterlyFederal Tax Return. However, as the program is concluded, you cannot submit aclaim using this form. Form 941-X, Adjusted Employer's Quarterly Federal TaxReturn or Claim for Refund, can still be used to make a backdated claim for theERC.

Claim the ERC for eligible quarters within three yearsof either filing your initial tax return or making the tax payment, whicheveris later. To claim credit for more than one quarter in the past, you must filea second Form 941-X.

Requirements for ERC Eligibility

To claim the ERC, you must first ascertain youreligibility and the applicable quarters. Let's delve a little more into therequirements for the ERC:

Government Order Forces Closure of Business

The primary criterion is the closing of a business. Ifa government mandate forced the closure of your firm, even temporarily, you maybe eligible for assistance. Since the government restricted public gatheringsand travel in 2020, this phenomenon became widespread.

Drop in Total Revenues

Another method of qualification is to calculatequarterly gross receipts. You qualify if your gross sales dropped by at least50% from the same period in 2019 to 2020. If your business's gross salesdropped by 20% from the same quarter in 2019 to 2021, you may be eligible forthis program. For example, you may qualify for the ERC in the first quarter of2021 if you had a 35% drop in gross receipts compared to the first quarter of2019.

Employer Prerequisites

To be eligible for the ERC, your company needed tohave hired at least one worker during the qualifying quarter. When consideringthis deduction, it's important to understand the distinction between a largeand a small business. In 2020, small businesses employed 100 or fewer full-timeworkers; by 2021, that number had increased to 500 or less. Wages given tonon-working staff by large companies are the only ones eligible for ERCreimbursement.

Qualified Wages

Your credit may be calculated using both part-time andfull-time pay. Wages are any salaries, gratuities, or other payments made by anemployer to its staff; they may also include costs associated with a qualifyinghealth plan.

Recipients of PPP Loans

Previously, businesses that took out a loan under thePaycheck Protection Program (PPP) were ineligible to use their ERC. If you havea PPP loan, you can still apply for the ERC. Earnings that went into your PPPloan repayment can't be included against your ERC. No overlap is allowed.

Be sure you meet all of these criteria beforesubmitting your ERC claim. Since the COVID-19 epidemic affected everyone, thevast majority of firms will be eligible. Make sure you submit your creditrequest during quarters when you are eligible to get it. If you have anyconcerns regarding eligibility, you should see an ERC professional.

The ERC Application Process: Eight Things to Keep in Mind

Assuming you are eligible for the ERC, the next stepis to file for the credit. Do not procrastinate in applying for this sizablecredit because of the potential benefits it may bring to your company. Let's goover what you may expect along the way to getting this done:

1. Complete Form 941-X With Accurate Figures

When completing Form 941-X, you maysee several line items that aren't related to the ERC, such as those for othertax credits. Locate the ERC line. You will need to have determined your creditusing the wages and the quarter in question.

2. Give a justification

Since Form 941-X is a form to amendyour original Form 941, you will also need to submit an explanation. Accordingto the IRS form instructions, "You must explain in great detail how youarrived at your adjustments.." The line numbers affected, the date yourealized your error or learned you were eligible for the ERC, the size of theerror, and its root cause must all be included in your justification.

3. Compile the Necessary Paperwork

Gather your materials anddouble-check their accuracy before submitting an application. You will need theoriginal tax returns you are making changes to as well as payroll information.You should also keep records of the quarters in which you were forced to stopdoing business or saw a drop in revenue.

4. Apply before the deadline

The time limit to submit an ERC claimis short. Form 941-X must be submitted no later than the later of (i) threeyears from the date of the initial payroll tax return filing, or (ii) two yearsfrom the date the tax was paid. If you miss the deadline, you will not receivethe credit you are entitled to.

5. If the IRS approves your credit, they'll send you a checkonce it's processed.

Your ERC credit will be issued as apaper check rather than a digital deposit. Since the epidemic, the IRS has beensomewhat slow, thus the time it takes for you to get a check varies.

6. The Credit Limits Apply to All Employers

You could have suffered large losses as a result of the epidemic. However, there is a cap on the total amount youmay claim, and this applies to all employers. For the first three quarters, youcan only claim up to $7,000 per employee every quarter, or $5,000 per employeefor 2020 and $21,000 per employee for 2021. Make sure you are aware of theserestrictions for the quarters you are requesting.

7. The ERC is exempt from taxation, but you may have to filean amended return.

The ERC's fiscal effects are yetanother area where many businesses lack knowledge. The earnings from an ERC areexempt from taxation. The reason for this is that the IRS does not include arefund as income. You will, however, pay less in taxes to your employer thanksto your credit. That will result in a lower salary bill for the year. It'spossible that this will improve your financial situation. Based on this newinformation, you may need to file an amended tax return for the relevant taxyear.

8. ERC Can Be Refunded in Its Entire Amount

Some tax credits, however, are notrefundable if they are not fully used against your tax bill. Anything left overafter paying your tax bill can be claimed as a refund from the ERC. This is amajor benefit since, even if you owe money in taxes, the IRS will still giveyou your entire credit amount.

Even if your calculations arespot-on, navigating the ERC application process can be challenging. That's whyit might make all the difference to engage with an ERC expert to speed up theprocess of obtaining credit. You wouldn't want to waste time and energy fixingsomething that wasn't broken in the first place.

For Assistance, Please Call ERC's Professionals Today

One of the best things about the ERC is that you don't have to do anything out of the ordinary to apply for it orfigure out your credit. If you need assistance figuring out your tax crediteligibility, your expected refund amount, your filing deadline, or anything else, you may consult with a professional who specializes in this area. Retroactively claiming the ERC requires careful attention to detail andknowledge of the most recent rules and regulations.

Our staff is here toa ssist you. Our professionals have a thorough understanding of tax regulations, filing requirements, and best practices to expeditiously get your tax refund. To learn more about your Employee Retention Credit opportunities, please contact us now.

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Carroll Fadel
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