Have you heard about the Employee Retention Credit (ERC) and wondered what you could or should do about it? The ERC is part of the CARES Act, aimed at helping businesses weather the COVID-19 financial storm.
The Fisher Bookkeeping team is here to meet your bookkeeping and CFO needs. If you’re ready for some outsourced help in this area, let’s connect. We are here to help with monthly payroll, PPP loans, ERC documentation, and more. Grab a time on our calendar to chat.
The ERC applies to anyone with employees. If that includes you and your business, then you need to do something. Here is a look at the basics of the Employee Retention Credit. For more in-depth and specific information for your company, talk with your bookkeeper, payroll company, or tax preparer.
The ERC is one component of the pandemic recovery package. Its purpose is to encourage businesses to keep employees on the payroll rather than laying them off during shutdowns and recovery.
Most businesses and organizations qualify for the ERC for payroll they submitted between March 12, 2020, and December 31, 2021.
Eligible businesses can receive tax credits based on the payroll of full-time employees they retained during this time. To be considered full-time, the employee must have worked at least 30 hours per week. These credits can be up to $14,000 per employee, so it’s definitely worth pursuing.
Businesses with employees in 2019, 2020, and 2021 may qualify to take advantage of the Employee Retention Credit. You must meet at least one of two requirements to be eligible for the credit in any given quarter of payroll:
Companies and organizations who qualified as essential workers during the shutdown cannot claim the ERC unless they show the proper revenue decrease. Similarly, businesses that could continue their work remotely will not qualify without demonstrating decreased income.
To determine if your business is eligible for this tax credit, you need to look at your top-line sales by fiscal quarter. You may qualify if either of the following applies:
You need to be making an apples-to-apples comparison here and go quarter by quarter. So if you’re looking at Q1 of 2020, you must put it up against Q1 of 2019.
Many business owners can clearly show a loss of revenue when comparing 2020 or 2021 to 2019. So why don’t they all qualify for the ERC?
Enter the PPP.
If you received a Paycheck Protection Program loan that you used to cover payroll in any qualifying quarters, then you are not eligible for the Employee Retention Credit. Remember, for full loan forgiveness, the PPP required 75% of the loan to go to payroll, and the remainder could go to other expenses.
You can’t double-dip with the ERC. However, for every payroll dollar not paid by PPP, you qualify for ERC.
Initially, if you received a PPP loan, you could not also take the ERC. However, the government recognized that the PPP funding wasn’t enough for many employers, so they adjusted the qualifications. They are trying to make things right for businesses that spent a lot of money beyond their PPP funds to keep employees.
If you never took any PPP loans and have deep enough losses, then every payroll dollar qualifies for the Employee Retention Credit.
This is a strange one! Unlike most other tax credits, you do not account for this on your annual return.
Instead, you need to work with your payroll company or professional to claim the ERC through payroll taxes. Generally, you will be accounting for this on Form 941. Wages you paid to full-time employees, as well as qualified health expenses, are part of the equation when your bookkeeper or other professional calculates your ERC.
Since we’re talking about a massive emergency piece of legislation that has already evolved quite a bit, there is always more to learn. As with anything in the tax code arena, there are layers of complications.
One significant area of confusion surrounds relatives of majority shareholders. This component is complicated and likely requires the expertise of a tax advisor.
Additionally, for Q3 and Q4 of 2021, there are a few extra qualifying situations for the ERC.
Again, because of the nuance and complexity, a tax advisor or attorney can best advise you in these situations.
Keeping up with your company’s financials under normal circumstances is challenging enough. Doing it during a global crisis when the rules seem to keep changing is enough to make a business owner’s head spin.
If you don’t yet have an outsourced bookkeeper for your company, we’d love to chat with you to see if we’re a good fit. Our Fisher Bookkeeping crew has offices in Portland, OR, and outside Lexington, KY, to serve clients around the country. We work with businesses in all stages of growth and count it an honor to be on your team. Book your free call today to get started.
Barb is the CEO of Fisher Bookkeeping, an outsourced bookkeeping consultancy that provides small businesses with a full-service financial department. Her favorite aspect of work is to break down the accounting to meaningful bits, so entrepreneurs can make a powerful difference in their own business. She's also a power lifter (squat: 215, DL: 270).