Maximizing the Employee Retention Credit: A Guide for Small Business Owners

As a small business owner, you may be familiar with the employee retention credit (ERC) initially introduced by the CARES Act in 2020. This tax credit was designed to encourage small businesses to keep employees on the payroll during the COVID-19 pandemic. It has since been extended through to December 31, 2021, and has undergone several updates and expansions.

The ERC is a refundable tax credit that enables qualifying businesses to claim up to $7,000 per employee per quarter, enabling them to reduce their federal payroll costs. However, it’s essential to understand that claiming this credit is not as simple as applying for it. Some specific criteria must be met, and the calculation of the tax credit can be complicated.

To maximize the employee retention credit, small business owners need to understand how the credit works and stay up-to-date on the ever-changing eligibility criteria. Here are some tips to help business owners take advantage of the ERC:

1. Understand the Eligibility Criteria

Initially, the employee retention credit was only available to businesses that experienced a substantial decline in revenue (50% or more) compared to the previous year’s quarters. But the ARPA Act passed in 2021 expanded the eligibility criteria. Small businesses that experienced a decline as little as 20% in the first two quarters of 2021 compared to the same period in 2019 are now eligible for the credit.

Additionally, non-profit organizations classified as 501(c) are now eligible for the credit. It’s wise to consult with a knowledgeable tax professional to understand the current eligibility criteria.

2. Know the Calculation Basis for Your credit

The ERC is calculated as a percentage of eligible wages paid to each qualified employee during a specific period. Initially, the credit was 50% of the first $10,000 in eligible wages paid to each employee for a maximum of $5,000 per employee between March 13 and December 31, 2020. The ARPA Act increased the credit to 70% of the first $10,000 in eligible wages paid per employee in each quarter of 2021 for a maximum credit of $7,000 per quarter per employee.

3. Keep Accurate Records of Qualifying Wages

Business owners must maintain accurate records of the wages paid to qualified employees. Qualifying wages include all taxable compensation and qualified health plan expenses paid.

Additionally, some employers may be eligible for retroactive credits for 2020 or may qualify for the payroll tax deferral for the first six months of 2021. Business owners need to have complete and accurate records of their payroll costs to ensure they are eligible for these credits and reduce their payroll tax obligations.

4. Review the Paycheck Protection Program (PPP) and ERC Interaction

Initially, businesses receiving PPP loans were ineligible for the ERC. However, the ARPA Act now allows businesses that received PPP loans to claim the ERC retroactively for 2020 and into 2021, under certain conditions. Consult a tax professional to determine how your PPP loan and ERC can work together best.

In conclusion, maximizing the employee retention credit can be a valuable tool for small business owners to reduce their payroll costs, especially in these unprecedented times. Understanding the eligibility criteria, accurately calculating the credit‘s basis, and maintaining records and combining the PPP and the ERC can make all the difference in receiving the credit‘s maximum benefit. Consult with a qualified tax professional for guidance and support in navigating the complexities of the ERC process.