The Employee Retention Tax Credit (ERC) is a way for business owners to potentially save thousands or more per year. It's an aid program that can provide substantial benefit but does not attract as much attention as the PPP or EIDL. The refundable credit allows small business owners to claim a credit for a portion of wages paid towards their taxes. The ERC could help you save over $30,000 per employee.
The ERC was originally slated to end on June 30th but will continue through the end of 2021 for small businesses facing revenue loss or shutdowns due to the pandemic. The ERC can be claimed for wages paid even if employees were not working. Here's what you need to know and if it's relevant for you.
How to Claim the ERC for the First Half of 2021
If your business can show a 20% reduction in quarterly gross receipts in 2021 compared to 2019, or if your business was shut down due to government mandates (like stay-at-home orders), you can claim the ERC for the first half of 2021 when you file your quarterly taxes.
You will be able to claim a refundable credit against the employer’s share of Social Security tax, equal to 70 percent of a full-time employee's qualified wages paid (which includes certain health plan expenses) from January 1 through June 30, 2021. The maximum ERC amount available is $7,000 per employee per quarter or $14,000 for eligible wages paid in the first half of 2021.
How to Claim the ERC for the Second Half of 2021
The ERC eligibility rules will be the same for the second half of 2021 as they are for the first half: you must have been shut down or show a 20% drop in receipts compared to 2019.
Like the provisions for the first half of the year, the ERC for the second half of 2021 is a credit against employer taxes (like Medicare), equal to as much as $7,000 per full-time employee per quarter during the last half of the year. That means in total, business owners can claim up to $28,000 per employee for the full year of 2021.
How to Claim the ERC for 2020
It’s not too late to claim the ERC for 2020, even if you already paid your quarterly taxes. You can file an amended tax return and receive the credit The 2020 ERC is less extensive than the 2021 version, however.
To access the 2020 credit, which spans March 12, 2020, through January 1, 2021, your company must show a more than 50 percent decline in quarterly gross receipts, compared with the same quarter in 2019. The credit is 50 percent of qualified wages paid, up to $10,000 per employee in 2020. The maximum credit available is $5,000 per employee.
Can You Claim the ERC If You Got a PPP?
PPP recipients are allowed to claim the ERC. Originally they were prohibited from accessing it, but that rule was changed when the Consolidated Appropriations Act (CAA), passed at the end of 2020. However, PPP recipients cannot claim the ERC on wages paid with their forgiven PPP loan; they can only claim it for funds that were not forgiven or for wages they did not pay with their PPP. You can learn more about applying the ERC as a PPP recipient here.
If your business has 500 or fewer employees, you are eligible for the ERC whether or not your employees were actually working (as long as they were paid). Businesses with 500 or more employees can claim the ERC only for hours their employees actually worked.
Conclusion: Claim the ERC for Your Small Business
The ERC allows small business owners to claim up to $33,000 per employee ($28,000 from 2021 and $5,000 from 2020), which could drop your taxes significantly.
If you kept your employees paid, even if they weren’t actively working, you should claim the ERC. It’s not too late to claim the credit for 2020, even if you already paid your quarterly taxes. You may want to enlist the help of an accountant or tax professional to get all the credits you are eligible for, especially if you received a PPP loan. We will also be posting more tax and financial information here on the Skip blog, which you can read online and on our app.
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