How Small Businesses Can Benefit From Claiming ERC (Employee Retention Credit)

This post may contain affiliate links and I may receive a small commission if you make a purchase using these links – at no extra cost for you. Please read my disclaimer here.

Welcome to our latest blog post, designed specifically to assist the lifeblood of our economy - small businesses. One of the crucial lifelines available to small businesses in times of economic hardship is the Employee Retention Credit (ERC). 

The Employee Retention Credit (ERC), a component of the U.S. government's CARES Act, is a fully refundable tax credit. It was established with the goal of motivating businesses to retain their staff despite economic hardships. However, understanding its functioning and tangible advantages may pose questions.

This blog aims to simplify the ERC, demystifying the process of claiming it and elucidating its potential benefits. 

Whether you're a start-up, a thriving small business, or facing a tough economic period, understanding and leveraging the ERC could prove pivotal for your enterprise's sustainability and growth. Join us as we delve deeper into the nuances of this vital financial resource.

Understanding the Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) is a significant provision in the U.S. government's toolbox for supporting businesses during tough economic times. The ERC Credit was first introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. 

Understanding the Employee Retention Credit

The intention was to incentivize employers to keep employees on their payroll, even amidst challenging circumstances such as a global pandemic or an economic downturn.

The ERC is a fully refundable payroll tax credit for eligible employers. This means that it isn't just a reduction in the owed taxes, but it can lead to the IRS refunding the employer if the credit exceeds the amount of payroll tax they owe.

But who qualifies for this credit? The answer to that largely depends on the specific legislation in effect at the time. Originally, the CARES Act specified that businesses had to demonstrate that they were either fully or partially suspended by government order due to COVID-19, or that their gross receipts for a particular quarter were significantly less than for the same quarter in the previous year. 

However, subsequent legislation, such as the American Rescue Plan Act of 2021, has expanded and extended the eligibility criteria and benefits of the ERC.

Grasping the essence of ERC is key for small businesses. Providing a safety net, it enables businesses to retain their workforce, contributing to the continuity and resilience of the business during uncertain economic times. 

The monetary impact of ERC on small businesses

The Employee Retention Credit (ERC) offers significant financial support to small businesses, especially during difficult economic times. The ERC is determined as a percentage of eligible wages paid to employees, encompassing a part of the health insurance costs. 

For example, the original legislation under the CARES Act allowed qualifying employers to claim a 50% credit on up to $10,000 in wages for each employee in 2020. This benefit was enhanced in later legislative changes, with the credit percentage boosted to 70% on up to $10,000 in wages for each employee per quarter in 2021.

To illustrate, consider a small business with 10 employees, each earning $10,000 per quarter. In this scenario, the business could claim $7,000 (70% of $10,000) per employee per quarter in 2021. With 10 employees, this would amount to a total credit of $70,000 per quarter, or $280,000 for the year!

This significant monetary benefit can greatly help small businesses manage their cash flow and maintain their operations during times of economic distress. In fact, several small businesses have been able to navigate through the economic downturn caused by the COVID-19 pandemic by effectively utilizing the ERC.

The ERC not only reduces the tax liability of businesses but can also lead to a refund if the credit exceeds the payroll tax owed. Hence, the ERC can actually put money back into the pockets of small businesses, providing a vital lifeline during tough times.

While the monetary impact of the ERC is significant, it's essential to remember that it's only available for eligible businesses. Therefore, understanding the eligibility criteria and how to claim the ERC is crucial for small businesses to benefit from this provision. 

How to claim ERC

Claiming the Employee Retention Credit (ERC) may seem daunting, but with the right understanding and preparation, it's a manageable process that can yield significant benefits.

Here's a step-by-step guide:

1 . Establish eligibility

The first step is to ensure that your business meets the eligibility criteria.

This typically involves demonstrating that your operations were either fully or partially suspended due to a government order related to COVID-19, or that your gross receipts for a particular quarter were significantly less than for the same quarter in the previous year. Consult with a tax professional or your local Small Business Administration office to ensure you meet the criteria.

Calculate the credit

2. Calculate the credit

Once eligibility is established, calculate the amount of credit your business can claim. This involves identifying qualifying wages, which may include health insurance costs, and applying the relevant percentage as per the law in effect at the time.

3. Prepare documentation

Maintain records showing how your business qualifies for the ERC. This may include financial statements, payroll records, and any evidence showing your business operations were impacted by government orders related to COVID-19.

4. Claim the credit

In order to secure the ERC, you are required to indicate the total qualifying wages and associated health insurance costs for each quarter in your employment tax return, typically through Form 941. If the ERC your business qualifies for surpasses the amount of payroll tax owed, the difference is returned to you as a refund.

5. Monitor for updates

The legislative landscape around the ERC is subject to change, and it's essential to stay updated. Changes may affect the amount of credit that can be claimed, the process for claiming it, or the eligibility criteria.

Remember, it's always a good idea to consult with a tax professional or a knowledgeable business advisor when navigating these processes. They can provide personalized guidance and help ensure you're accurately claiming the ERC. 

The role of ERC during economic downturns

Economic downturns can present significant challenges for small businesses. In such periods, Employee Retention Credit (ERC) comes into the limelight as a potent financial lifeline.

Economic downturns

When revenue streams are hampered during a recession or crisis like the COVID-19 pandemic, businesses often struggle to keep their operations going. Retaining employees, who are the cornerstone of any business, can become particularly challenging. This is where the ERC plays a crucial role. By providing a refundable tax credit on payroll costs, the ERC helps businesses keep their teams intact, even when times are tough.

For instance, during the COVID-19 pandemic, countless small businesses were hit hard. However, many were able to stay afloat and keep their employees on the payroll, largely due to the financial cushion provided by the ERC. It essentially acts as an economic stabilizer, helping small businesses maintain their workforce and enabling them to bounce back more quickly when conditions improve.

In essence, the ERC serves as a critical tool for economic resilience, providing support for small businesses when they need it the most. It underscores the government's commitment to job preservation, business continuity, and overall economic recovery. 

Misconceptions and common mistakes while claiming ERC

While Employee Retention Credit (ERC) can be highly beneficial for small businesses, misconceptions and errors in claiming the credit can hinder its utility. Here are some common ones to avoid:

1. Eligibility misunderstanding

Certain businesses might think they don't qualify for the ERC because they weren't entirely closed. However, even if your operations were only partially suspended due to governmental directives, or if there's a substantial decrease in your gross receipts for a particular period, your business could still be eligible for the ERC.

2. Miscalculation of qualified wages

The calculation of the credit is often misunderstood. It's essential to include not just salaries or hourly wages, but also a portion of the cost of employer-provided health care.

3. Double-dipping with PPP

Another common error is attempting to claim the ERC for wages covered by a forgiven Paycheck Protection Program (PPP) loan. The IRS does not permit "double-dipping"; hence, wages used to obtain PPP loan forgiveness cannot also be used to claim the ERC.

4. Overlooking updates

Many businesses fail to keep track of legislative updates. Changes in laws can significantly impact the amount, process, and qualifications for claiming ERC.

Avoiding these common pitfalls can make the process of claiming the ERC smoother and more beneficial. Consulting with a tax professional or a knowledgeable business advisor can be very helpful in avoiding these and other potential errors. 

Seeking professional help for claiming ERC

Given the potential complexity of claiming the Employee Retention Credit (ERC), seeking professional help can be invaluable.

business advisor

A knowledgeable tax professional or business advisor can guide you through the process, ensuring that you meet eligibility criteria, correctly calculate the credit, and appropriately document everything.

Professionals stay updated on legislative changes affecting the ERC and can help you maximize the credit your business claims. Moreover, they can assist you in avoiding common mistakes, saving time, and reducing the risk of audits or penalties. To find a suitable professional, consider recommendations from your business network, or consult with your local Small Business Administration office. 

Conclusion

The Employee Retention Credit (ERC) is a potent tool that small businesses can utilize during economic downturns. It offers significant monetary benefits, helping businesses to maintain their workforce and sustain operations when facing financial challenges.

The process of claiming the ERC involves establishing eligibility, calculating the credit, preparing necessary documentation, and monitoring updates. While this may seem complex, the potential financial benefits make the effort worthwhile. Additionally, seeking professional assistance can simplify the process and ensure that your business maximizes its claim.

Remember, the ERC is more than just a tax credit. It's a lifeline that can keep your business afloat during tough economic times. It underscores the importance of employee retention for business continuity and resilience.

In the ever-changing economic landscape, it's crucial to leverage all the resources available to your business. So, consider the ERC, understand its potential, and harness its benefits. It could make all the difference in maintaining your business's stability and setting the stage for future growth.

In conclusion, the ERC isn't just an option to consider—it's a resource to be harnessed for the health and growth of your small business. So, start the process, claim your ERC, and continue to make a difference in the world of business.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}