As businesses around the world continue to navigate through the aftermath of the COVID-19 pandemic, many are looking for innovative ways to remain competitive while retaining their top talent. One such strategy that has gained significant attention is the Employee Retention Credit (ERC), which provides financial incentives for companies to retain their employees on the payroll during these challenging times.
The IRS has pulled many businesses out of economic turmoil caused by the global coronavirus pandemic and saved countless jobs across multiple industries and sectors via the ERC program. It has saved over $100 billion in US tax credits against eligible businesses by March 2021.
At the same time, the employee retention program has also boosted employees’ morale, loyalty, productivity, and motivation despite the economic turmoil. Job security and financial stability offered by the ERC amid a financial crisis have helped uphold the economy and saved countless businesses from shutting down.
This blog will explore some of the most significant benefits of Employee Retention Credits for business owners across the US.
1. Many Business Sectors are Eligible for the ERC
Your business may qualify for the Employee Retention Tax Credit (ERTC) across multiple sectors and industries if it meets the eligibility criteria from March 13, 2020, to December 31, 2021. If you are wondering, ‘Is Covid a natural disaster for taxes?’ the answer is yes. The federal government and the IRS declared it a natural disaster as it met all the requirements of a natural disaster, such as floods, fires, hurricanes, earthquakes, etc., on March 12, 2020 and offered relief to incentivize businesses to retain their employees.
However, to qualify for the tax benefits, your business must have suffered full or partial suspension due to the government order and incurred at least a 50% decline in gross receipts for a quarter in 2021.
To determine if your business qualifies for the credit, you can compare your current quarterly revenue to the revenue of the same quarter during the eligibility period. Alternatively, you can contact professionals to make the comparison.
2. Claim ERC for Multiple Employees
If your business meets the eligibility criteria for the Employee Retention Credit, you may claim it for multiple employees at once. A report by the Treasury Department issued in March 2021 states that the ERC successfully retained over 91 million jobs in the United States.
Due to its success, the federal government extended and expanded its horizon to save more and more jobs. You can find the most recent extension signed into law as part of the American Rescue Plan Act of 2021. It stated that businesses could claim the ERC for up to $28,000 per employee for the first two quarters of 2021, increasing the amount for the third quarter.
The availability of the ERC for employees of a wide range of business sectors can make it easy for you to retain talent and keep them motivated.
3. If you received PPP funds, you might still be eligible for the ERC
A common misconception businesses have is that they cannot qualify for the ERC if they receive PPP funds. However, that is not always the case, as it depends on certain eligibility criteria and requires carefully evaluating the two programs.
Per the latest Consolidated Appropriations Act 2021, businesses that received PPP funds can also claim the ERC for unpaid wages with the forgiven PPP funds. It means that businesses can still claim the tax credit against wages paid to employees during the same period that they received PPP funds, as long as those wages did not qualify for PPP loan forgiveness.
This modification in the ERC program proved beneficial for businesses most hit by Covid-19 during the eligible period, allowing the much-needed financial relief to stay afloat. Businesses can reduce their tax liabilities by taking advantage of the ERC and the PPP loans.
However, please remember that the PPP loan and the ERC program can be complex and may require a qualified tax professional or an accounting firm’s consultancy. These professionals can help optimize the benefits of both programs and maximize your business profitability.
4. ERC Lowers Social Security Tax Liability
The ERC program offers a significant advantage regarding your social security tax liability. Your business can now claim taxes against your social security tax liability and save money.
Your business can claim up to $7,000 per employee per quarter against their share of social security taxes if eligible. It translates into your business saving social security tax liability by up to $28,000 per eligible employee for the first two quarters of 2021.
Reducing social security tax liability can be particularly advantageous if your business has high payroll expenses, as social security taxes can be a significant portion of the business’s overall tax liability. By claiming the credit against your share of social security taxes, your business can free cash flow and invest in other business areas, such as hiring and training employees or investing in new equipment and technology.
5. The Process to Claim ERC is Easy
Claiming the ERC program is relatively straightforward, especially if you retain your business’s payroll records and other relevant documentation. Eligible businesses must complete and file IRS Form 941, used to report quarterly employment taxes to claim their credit.
Businesses can claim the credit on their quarterly Form 941 by reducing the amount of employment taxes they owe. Alternatively, businesses can file an amended Form 941-X for prior quarters to claim the credit and receive a refund for previously paid taxes.
However, remember that the process of claiming the ERC varies depending on the specific business circumstances. For example, if your business already received the loan PPP funds, claiming the ERC can become complex due to certain rules and regulations regarding the two programs. In some cases, businesses have even pursued an ERC refund lawsuit to resolve disputes around eligibility or amounts claimed.
Therefore, it is better to consult professional tax accountants to ensure your business is eligible for the ERC claim. They can guide you regarding the eligibility and documentation requirements and other ERC program aspects to get the most from it. In addition, they help businesses navigate complex tax rules and regulations.
Conclusion
The Employee Retention Credit (ERC) is an excellent tool to claim taxes while retaining employees. Given certain eligibility criteria and requirements, many business sectors and industries are eligible for the program, and you can claim it for multiple employees at a time.
Moreover, you can take advantage of the loan PPP funds and the ERC by consulting professionals. It also offers significant social security tax benefits, helping businesses lower their tax liability and free up cash flow.
Finding out the eligibility for ERC and applying for it is simple. However, it is better to consult professionals to let you establish the basis for the criteria, which can vary from one business to another
