The ERTC came at a time when businesses had experienced severe losses due to the pandemic. This resulted from a partial or total shutdown of certain business operations due to the pandemic’s worst impact in certain regions. The Employee Retention Tax Credit was a solution.
What Is the Employee Retention Tax Credit?
In short, the Employee Retention Tax Credit is a relief the US government offers businesses. These businesses should have been operational during the pandemic and incurred major losses in gross receipts or shutdowns.
The Employee Retention Tax Credit gives financial relief to businesses through the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020. This act has also witnessed further modifications and additions over the past few years.
The Purpose of the ERTC
The main purpose of the ERTC was to encourage businesses to maintain their profits and keep their workers employed. The pandemic forced many workers to quit as businesses shut down and could no longer pay them.
Through the ERTC, the CARES Act allows employers to receive a tax credit. This was provided at a percentage of qualified wages they had paid their employees during the pandemic. Employers could receive up to 70% of the qualified wages with a cap at a specific maximum amount.
Employers were restricted by the IRS from eligibility in the past. The IRS still applies strict eligibility criteria that must be passed in case businesses want to receive tax credit benefits. This includes a noticeable decline in gross receipts, full or partial shutdown or operations, or a new startup.
Over time, not just the requirements but also the forms have changed. It is important to consult a tax professional or do your homework before you apply for the tax credit.
Is My Business Eligible to Receive Employee Retention Tax Credit?
It is important to analyze your organization’s qualified wages and do the calculations before applying for the Employee Retention Tax Credit. Your business must be eligible if you want to receive the credits. Thus, certain criteria need to be met;
- Business Operations
Your business must have been active during the pandemic. Businesses formed post-pandemic do not qualify for the ERTC. Your business could have only incurred a loss in gross receipts or a full or partial shutdown if it was operating during the pandemic.
This includes all non-profit organizations and governmental entities as long as they could employ people and pay qualified wages during the period.
- Suspension of Business Operations
The second and most important factor is business operations’ partial or total suspension. The IRS requires you to prove that you experienced a partial or full suspension of business operations during this time. This suspension must have resulted from the pandemic and government orders.
In some cases, a partial suspension resulting from extremely low gross receipts can also be considered a suspension. However, careful documentation of this information is required as the IRS might not grant eligibility without proof.
- Gross Receipts
Instead of showing a partial or full suspension of operations, your business can also show a decline in gross receipts in that period. This can lead to eligibility if the decline in gross receipts is significant. This decline was a 50% reduction in 2020, and it reduced to 20% in 2021.
Remember that the decline must be relative to the previous quarter. It is important to maintain data and fill out the forms accurately. We recommend hiring an expert to navigate the complicated forms and stay calm through the process.
Remember that recovery startup businesses can also be eligible for ERTC. Companies founded after February 15, 2020, are eligible for a special form of ERTC. The CARES Act has recently introduced this to the list of eligibility routes through the understanding that establishing a business during the pandemic would be difficult.
- Qualified Wages
Qualified wages must be calculated according to the eligible periods. The ERTC only applies to wages from March 13, 2020, till January 1, 2022. Moreover, it is essential to understand the meaning of qualified wages.
Qualified wages do not include any wages paid to an employee that can be related to the employer. Wages for relatives are not considered qualified wages, and a long list of guidelines regarding relatives’ wages has been released by the ERTC that can be quite difficult to navigate.
Why Hire a Professional
You may ask, “Why should I hire a professional for an employee retention tax credit when I can save money and do it on my own?” Hiring a professional can help you save in the long run.
For many employers, calculating the ERTC is difficult and can lead to mistakes that cause ineligibility. Filling out the forms repeatedly can lead to extra costs and wasted time. Professionals have the expertise and knowledge to calculate tax credits and help you understand eligibility.
Moreover, since they have the experience, they can help you understand where you went wrong the last time. Through this experience, they can also help you make the most of the ERTC and get the most benefits.
Furthermore, an ERTC professional can give you the peace of mind to focus on other, more important business operations that need your urgent attention.
Contact RLA now for more information!