Our economic situation and outlook have changed dramatically since the beginning of the pandemic. To stabilize the business environment and provide relief to business owners, lawmakers and leaders have passed many policies that help American businesses stay afloat. One such policy is the employee retention tax credit.

In today’s article, let’s understand what Employee Retention Credit is and how you can utilize it.

If you’re unsure how you can claim these benefits or qualify as a beneficiary, please get in touch with one of our expert CPAs in Maryland at Sigma. We’ll definitely help you!

What Is Employee Retention Credit

Employee Retention Credit is a tax break available to small businesses which helps them tide over the uncertainty. First introduced in the CARES act in 2020 has enabled over 30,000 small businesses to claim over $1 billion collectively to run and grow their business.

Who is eligible for ERC?

Any business that has been operational in 2020 and fulfills one of these two criteria.

  • Faced a Full or Partial Suspension Due to Government Order
  • Saw Significant Decline in Gross Receipts

If your business falls in one of these two categories, then you’re eligible for ERC.

For the purpose of this eligibility, significant decline in gross receipts refers to:

For 2021 ERC – A quarterly revenue decline of 20% or more compared to the revenue from the same quarter of 2019.

For 2020 ERC – A quarterly revenue decline of 50% or more compared to the revenue from the same quarter of 2019.

What Are The Maximum Amounts That A Business Can Claim For ERC Credit?

For Employee Retention Credit 2020 – Credit to the amount of 50% of all qualified wages up to $10,000 with a maximum credit per employee of $5,000

For Employee Retention Credit 2021 – Credit to the amount of 70% of all qualified wages per quarter up to $14,000 with a maximum credit per employee of $14,000.

Common Misunderstandings Regarding Employee Retention Credit

1. A Business Can’t Claim ERC If Their Revenue Didn’t Drop By 50% Or More

This is a common misunderstanding, and many small business CPAs don’t make their clients aware that there are other ways to qualify for ERC tax credit.

Any business that faced a full or partial suspension due to a government order is eligible for ERC. So if COVID impacted your business, then you too can claim this credit.

2. A Business That Grew In Revenue And Profits During The Quarantine Isn’t Eligible For ERC

This is another common misunderstanding that needs to be addressed. Even if a business grew during the quarantine, if they faced full or partial suspension of business, then they qualify for employee retention credit in 2021 or 2020.

3. The Business That Was Running In Loss Or Has No Tax Liability Isn’t Qualified For ERC

The ERC is a refundable credit. It means that a refund is issued to a taxpayer/business owner if a credit overage exceeds tax liability. So even if your business doesn’t have a tax liability or is running in loss, you can still benefit from this scheme.

4. The ERC can only be claimed by for-profit businesses and not by charities or NPOs.

In addition to charity organizations, the ERC also benefits a wide variety of nonprofit organizations, including churches, nonprofit hospitals, museums, etc., so even if you are a not-for-profit business or a charity, you can claim the employee retention credit 2021.

5. Any Business That Has Claimed PPP (Paycheck Protection Program) Or Has Had Their PPP Loans Forgiven Isn’t Eligible For ERC.

CAA 2021 removed the restriction that allows only one of these two credits to be utilized by any business. You can now claim both ERC and PPP together.

Besides, PPP only accounts for 2.5 times your monthly payroll costs and is spread over a six-month period. As a result, there are plenty of wage expenses that can be claimed under ERC.

Documentation and Employee Retention Credit

There are many advisers who will tell you that they can create simple forms to make your business fit the outlined criteria and expect the IRS just to hand in the aid. This is impossible.

For any business to qualify for the ERC, they need proper documentation of everything. You must ensure that you have all contemporaneous documentation on hand before you even think of claiming this tax break. If you want your business to qualify, then you need your CPA to properly and thoroughly document how and why you are eligible for the ERC.

All of this may sound a bit convoluted to you if you don’t have a background in finance and taxation, and rightfully so. But you don’t need to worry about it. Our team at Sigma is here to take the burden of managing your books and maintaining your accounts away from you, so you can relax and focus on growing and running your business.

The ERC is a fantastic tax incentive that can help your business. Speak to a qualified small business CPA if you’re a business owner to utilize these benefits.

Please speak to us today or schedule a meeting to understand how we can help you with our accounting and bookkeeping services in Maryland. Please feel free to call us or drop by our office.