Did you know that in 2021 there are bigger and better tax incentives for small businesses affected by COVID-related shutdowns and disruptions? Similar to last year, the Employee Retention Credit is still a benefit that many businesses qualify for. With tax season quickly approaching, it is important to learn if you are eligible for the Employee Retention Credit.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit against certain employment taxes equal to 50% of the qualified wages an eligible employer pays to employees. The refundable tax credit is 50% of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. Eligible employers can get immediate access to the credit by reducing employment tax deposits they are otherwise required to make. Also, if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.
How do you Qualify for the ERC?
To qualify for the 2021 fiscal year, your business must have experienced the following elements:
- Operations were partially or fully suspended due to governmental orders to minimize the spread of COVID-19.
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Experienced a decline in receipts. (Less than 80% of gross receipts for the same quarter in 2019)
- If you were not in business in 2019, 2020 can be used
To gain a better understanding as to whether or not you qualify, here is a chart provided by, Investopedia.com:
Who Doesn’t Qualify for the Employee Retention Credit?
There are some types of businesses that will not qualify for the ERC in 2021. Government and state entities and political subdivisions are not eligible for the 2021 ERC, but tax-exempt public colleges, universities, and hospitals are eligible. If you were self-employed in 2021, then you are not eligible for your own wages. If your business employs other people, then you may qualify for the ERC wages paid to those employees. Additionally, if employees are a family members of the owner, or own more than 50% of the company, they are not eligible to receive the employee retention credit.
What Wages Qualify Under the Employee Retention Credit?
The number of full-time employees you averaged in 2019 determines which employees you can claim for the credit. Similar to qualifying for the program itself, if your business did not exist in 2019, refer to 2020. For 2021, if you averaged more than 500 full-time employees, meaning that if you employ more than 500 people, then you can only claim the ERC for those who are not providing services. If you have 500 or fewer employees, then you can claim the ERC for all of them, working or not.
How to Claim Credit
In order to claim the Employee Retention Credit, eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most employers, beginning with the second quarter. The credit is taken against the employer’s share of Social Security tax but the excess is refundable under normal procedures.
In anticipation of claiming the credit, employers can retain a corresponding amount of the employment taxes that otherwise would have been deposited, including federal income tax withholding, the employees’ share of Social Security and Medicare taxes, and the employer’s share of Social Security and Medicare taxes for all employees, up to the amount of the credit, without penalty, taking into account any reduction for deposits in anticipation of the paid sick and family leave credit provided in the Families First Coronavirus Response Act.
Eligible employers can also request an advance of the Employee Retention Credit by submitting Form 7200.
Final Thoughts
The Employee Retention Credit can be extremely beneficial for your business. To reap as many benefits as possible, it is important to learn how your business can qualify. For further insight, click here to access more detailed information from the IRS’s article addressing the Employee Retention Credit.
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