If you had W-2 employees in 2020 and/or 2021, you need to look at the Employee Retention Credit (ERC).
As you likely know, it’s not too late to file for the ERC. And now is a good time to get this done.
You can qualify for up to $5,000 per employee in 2020 and up to $7,000 per employee for each of the first three quarters of 2021. That’s a possibility of $26,000 per employee.
You claim and adjust the ERC using IRS Form 941-X, which you can file anytime on or before April 15, 2024 for 2020, and April 15, 2025 for 2021. Don’t wait until the deadline. The IRS is constantly changing the rules.
You have three ways to qualify for the ERC:
- Significant decline in gross receipts. Compare the gross receipts quarter by quarter to those in 2019. To trigger any ERC under this test, you need a drop of more than 50 percent in 2020 and a drop of more than 20 percent in 2021.
- Government order that causes more than a nominal effect or modification to your business. This requires looking at either your 2019 quarterly receipts or your 2019 quarterly hour worked by employees and seeing that the 2020 or 2021 shutdown order would have affected the 2019 figures by more than 10 percent. The IRS also deems that the federal, state, or local COVID-19 government order had a more-than-nominal effect on your business if it reduced your ability to provide goods or services in the normal course of your business by not less than 10 percent.
- Recovery Startup. Finally, if your business started earning revenue for the first time after February 15, 2020, and your average annual revenue is under $1 million, you automatically qualify for quarter 3 and 4 of 2021. Notably, there is a $50,000 credit cap per quarter under the recovery startup qualification. This means that the maximum amount a recovery startup can earn in ERC is $100,000 (not too bad!). We discuss recovery startups in depth on our blog post here.
Okay, you think you qualify, how much can you expect to earn? As stated above, the maximum is $26,000 per employee. This is easily reached as long as employees earn $10,000 or greater per quarter (including healthcare premiums paid by employers). Grants, like the Paycheck Protection Program (PPP), can reduce your overall ERC amount, but as long as you have payroll to spare, you can still expect to receive a sizable amount of ERC (all of our clients that received PPP loans still qualify for ERC).
The ERC is an underutilized way of receiving compensation for the hardships shared by business owners throughout the pandemic. If you think you may qualify, don’t hesitate to contact us and get started on your ERC Journey!
