Written By Austen Legler, team member of TaxTaker, a Punch Financial partner
The pandemic was rough for a lot of folks. If you’re a business owner or you run a startup, maybe you had to shut operations down for a bit. Maybe you had to limit the amount of people that could be in your office at any given time. And maybe your numbers took a hit because of all the chaos.
We know how hard it is to run a business even without trying to navigate the craziness brought on by Covid19.
But there’s some good news, and that good news comes in the form of a three letter word: Employee Retention Credit.
Heard of it?
If so and you’re already reaping the benefits, awesome! If not, you’ll want to keep reading.
What is the Employee Retention Credit?
In a nutshell, it’s a government program created by Congress to encourage employers to keep their employees on the payroll during the months affected by the coronavirus pandemic.
When President Biden took office, the Infrastructure Investment and Jobs Act introduced the Employee Retention Tax Credit (ERTC) program, a fully refundable payroll tax credit that essentially rewards businesses who kept employees on payroll during the months affected by the coronavirus pandemic.
The original window for the program closed back on September 30, 2021, while Recovery Startup Business stayed eligible to pay wages through December 31, 2021, to claim the credit.
The problem? A lot of businesses didn’t know this existed!
Because of the confusion around who was eligible and so many businesses not accessing the money, the government extended the program by allowing companies to claim the Employee Retention Credit for the next three years retroactively.
Who Qualifies?
If you kept most of your staff on payroll during the pandemic, the government essentially wants to reward you.
Qualification is determined by one of three factors:
- Your business was fully or partially suspended or had to reduce hours due to a government order – either federal or local.
- Your revenue declined by 20% or more in any quarter in 2021 compared to the same quarter in 2020 (or 2020 to 2019).
In simple terms, if you run a business that had to partially or fully suspend operations due to COVID-19 or experienced a decline in percentage of gross receipts as compared to the same quarter the previous year (e.g, 2020 to 2019 or 2021 to 2020) then you likely qualify.
And one of the best parts? It’s available to all business types. Restaurants, non-profits, construction companies, museums, manufacturers, you name it.
There are only TWO exceptions to eligibility for the program:
- State and local governments and their instrumentalities
- Small businesses who take Small Business Loans
How is it calculated?
As a means to not have a ton of red tape (and angry business owners), the government didn’t make the process super complicated.
So the breakdown is pretty straightforward.
For 2020, you can get back up to $5,000 per employee per year. For the year 2021 on the other hand, there’s a relatively simple provision that now allows you to claim up to 70% of qualifying wages paid up to $10K. This is just a more complicated way of saying you can get back up to $7,000 per employee, per quarter.
Say you have 10 employees. You pay each employee $10,000 in qualified wages during the quarter. Because you can claim $7,000 per employee per quarter, your Employee Retention credit would be $70,000 ($7,000 X 10 employees).
That’s $70,000 of refundable capital!
$70,000 that can go towards hiring that new rockstar engineer. $70,000 towards that awesome new website you’ve been wanting to build. The possibilities are endless!
If your company had less than 100 employees, then the credit is based on the money paid to every employee. It doesn’t matter if they worked or not, and it doesn’t matter if your employees worked full time and paid for full-time work. You still get the credit.
This is a massive win for small businesses.
What about the Recovery Startup Provision?
Congress acted because the pandemic was brutal for so many businesses and people. To jump-start the economy and get it humming again, the ERTC was expanded, and this time it was for companies who braved the elements and started a business before the end of 2021.
To be eligible for the Recovery Startup provision of the Employee Retention Tax Credit, you need to meet these two criteria:
- Your business had average annual gross receipts of no more than $1,000,000 from 2018, 2019, and 2020
- You started a new business after February 15, 2020
What’s considered a “new business?”
Generally, this is what it sounds like – did you start a new company in the middle of the pandemic against the odds? This can be a trade, product, or service, even a new offering within an existing business.
If you started a new business, that’s awesome. But, to claim the ERTC, you might run into some questions. You’re going to have to provide support for your claim. The more you can show proof that your business meets the qualifications, the stronger your claim will be.
Now, granted, no claim is one-size-fits-all, but arming yourself with information is never a bad thing, especially when dealing with the U.S. Government.
If you’re making a claim, you need to meet at least two of the following criteria:
- Does your new business have a different name or brand?
- Do you have a website or online presence?
- Can you show target customers?
- Can you show employees?
- Do you have specific bank records?
- Where is your office or facility?
You’re going to need to answer at least two of these. We suggest having answers for all of them.
How much is the Recovery Startup provision worth to my company?
Typically, the credit amount is 70% of qualified wages paid from the start of your new business or by July 1, 2021.
Here’s some quick information:
- You can get up to $7,000 per employee per quarter.
- The credit can’t exceed $50K per quarter, with a maximum of $100K – if you’ve got eight employees making at least $40K a year, you can apply for the maximum credit.
- The credit can be claimed for 2021’s third and fourth quarters.
How Do I Claim the Employee Retention Credit?
To claim the ERTC, you report your total qualified wages on your quarterly employment tax returns (Form 941). For quarters that are filed on time, you’ll include Form 941. For past quarters, you’ll use Form 941-X.
And keep in mind, if you use a third-party for your payroll, you’ll need to coordinate with them to make sure the forms are properly filed.
Wrapping Up
Thousands of startups and SMBs across the country are failing to take advantage of the ERTC and leaving billions on the table.
But it’s not their fault. The ERTC is so often misunderstood, or so often gets overlooked (kind of like the R&D tax credit)!
To help you claim it, we recommend working with Punch Financial and getting connected with an expert like TaxTaker, a trusted Punch partner, to make a quick determination on how much money you’re eligible for and then help you get it.