The COVID-19 pandemic threw many people’s lives into chaos, but none quite so much as the small business owner. These companies, which range in size from one single employee to up to one hundred or more, all suffered plenty of losses. Revenue was down, businesses had to close their doors temporarily until the worst of the pandemic has passed, and plenty never reopened. In order to prevent the latter scenario from happening, the federal government passed several pieces of legislation intended to help companies both large and small.
The 2021 Employee Retention Credit is included in that, as it it’s designed to reward businesses that kept employees on their payroll and working. Since this helped the economy recover (which is still in the progress of happening), it makes plenty of sense that companies get a break on their taxes for keeping people employed and paid. The 2021 Employee Retention Credit is just one piece of this puzzle, but it’s a very important one.
The CARES Act
In 2020, Congress and the Senate passed the CARES (Coronavirus Aid, Relief, and Economic Security) Act, which then-President Trump signed into law on March 27, 2020. Along with plenty of individual help, such as additional unemployment funds and a personal stimulus for tax payers, the Act set up a number of bailouts for small businesses. Among these were the Paycheck Protection Program, the Emergency Capital Investment Program, and the Small Business Tax Credit Program, all of were designed to put much-needed money into the hands of small businesses, so they could recover financially, keep their workers employed and paid, and keep their businesses open.
The American Rescue Plan Act
Almost one year after the CARES Act was signed into law, Congress and the Senate passed the American Rescue Act. This Act took care of a number of different things and built onto everything put into place by the American Rescue Plan Act. President Biden signed this act into law on March 11, 2021, and it provided additional unemployment funds, more stimulus money for qualifying tax payers, and funding for a number of different organizations and businesses. The American Rescue Plan Act also made it easier for Paycheck Protection Program loans to be forgiven, as well as for that forgiven amount to be made tax-free by the Federal government. This means that the forgiven loans do not need to be declared as income on a tax return.
The Employee Retention Credit
So, what is the Employee Retention Credit and what is it designed to do? This credit was created in order to reward companies that kept their employees working and on the payroll during the COVID-19 pandemic. In order to qualify for the credit, businesses must meet a number of different criteria, including:
- The business declined in 2020 and 2021. During both calendar years, if the business lost 50% of their gross proceeds or more, they are eligible for the credit. This means that they lost revenue, either due to people not buying their goods and services or because they were shut down for part of pandemic.
- They had to partially shut down their operations. The COVID-19 pandemic caused both federal and state governments to declare that companies that were deemed non-essential (as in they did not sell crucial supplies needed by people during the pandemic) to either shut down or have their employees work from home. Companies that fit into the former category, those that closed down for part of the time, are eligible for the credit. Those that fit the former, especially the businesses that remained lucrative, are not.
- They are considered to be recovery startup businesses. Companies that fit into the recovery startup category, as in they opened their doors after February 15, 2020, fall into this category. As long as they can prove that they opened during this time period and their gross receipts are no higher than $1 million. However, they do have a quarterly ERTC cap of $50,000.
In addition, companies both large and small qualify for the 2021 Employee Retention Credit. Those with:
- More Than 100 Full Time Employees – The only wages that qualify for the Employee Retention Credit are those that were paid to workers when the business wasn’t operating due to the pandemic. For example, if the company shut down for a month, yet still paid their workers, those amounts would qualify for the credit.
- Less Than 100 Full Time Employees – Have all of their employee salaries qualify for the credit. Even if the business is closed due to the pandemic or fully open for business, the company can still use the Employee Retention Credit on their taxes.
What Is a Tax Credit?
When companies are doing their taxes, they notice that there are two different means of subtracting money from their returns. The first is a deduction, which comes off of the company’s gross revenue, shrinking down the amount that they made during the year. The second is a credit. These tax credits are viewed more favorably than deductions because they come off at the end of the return, taking away whole dollar amounts from what the company owes the IRS. For example, if the company owed $10,000 and had qualifying credits in the amount of $5,000, then they would only owe the Federal Government $5,000.
Since the 2021 Employee Retention Credit falls into this latter category, it saves companies money by taking away part of what they owe to the IRS. This greatly helps businesses that lost revenue due to the pandemic and may be struggling to survive. For those that are thriving, the credit is a bonus that rewards them, in a way, for paying their workers during the pandemic, regardless of the circumstances.
How Does the 2021 Employee Retention Credit Work?
Companies of all sizes need to pay a portion of their employee’s social security tax. The amount varies, based on what the employee makes, as well as how much they contribute towards their social security taxes. The company pays the rest. However, with the Employee Retention Credit, businesses can receive a tax credit for a portion of what they paid for each employee’s social security taxes. This amount, up to 70% of that particular tax credit, counts for each qualifying employee.
How much of their salaries are eligible? In 2021, the qualifying wages are up to $10,000 for each employee, and the maximum amount of the credit is $7,000 per employee for each of the first two quarters of 2021. This means that for each qualifying employee, the company can receive a credit of up to $14,000 during the first half of the year.
Claiming the Employee Retention Credit
How can they claim the Employee Retention Credit? This is not done on their yearly tax return. Instead, companies can deduct the amounts from the quarterly taxes that they pay to the federal government. These quarterly taxes consist of employment taxes and social security taxes, the latter of which qualify for the credit.
Smaller companies, like those with fewer than 500 employees, can request an advance on this credit from the federal government. This puts a little more money in their accounts, helping them weather the storm brought on by the COVID-19 pandemic.
An Extension Thanks to the American Rescue Plan Act
Originally, the 2021 Employee Retention Credit was limited to the first two quarters of the year, ending on June 30, 2021. However, when the American Rescue Plan Act was signed into law by President Biden in March of 2021, it was extended. Now, the Employee Retention Credit can be applied to every quarter of the year, ending on December 31, 2021. This provides some additional relief for businesses that are struggling, yet still able to pay their employees as the economy recovers from the pandemic. The same qualifications are in place as were previously, making it easier for companies to determine which employees qualify and how much of a credit they are allowed to take.
Getting Advice on the 2021 Employee Retention Credit
It’s easy to end up with questions when determining whether or not certain employees qualify for the credit and how much the Employee Retention Credit should be. This is why it helps to seek the advice of a professional tax preparer. They can help you with this part of the process and ensure that everything is done properly, so you don’t have to face IRS fines and penalties.
Contact Us Today
If you believe that your company is eligible for the 2021 employee retention credit or have filed your quarterly taxes and declared the credit on them and now have additional questions, then reach out to the tax advisors at Enterprise Consultants Group. We can answer your questions, discuss your rights, and provide actionable options. Please contact us online or at (800) 575-9284 today to schedule a free and confidential consultation to see how we can help you.
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