Employee Retention Tax Credit works wonders for businesses, especially when you are a small business. A credit that counterbalances various employment taxes and sudden economic losses incurred during the pandemic. But unfortunately, many employers fall prey to some myths and don’t apply for the credit. Here, we will be addressing those myths and their avoidance.
The Covid-19 plague did immeasurable damage to businesses. While the large organizations found ways to sustain themselves, the smaller ones weren’t so lucky. Therefore, the CAA of 2020, alongside the CARES Act of 2020 and ARPA of 2021, initiated the Employee Retention Tax to help small to medium-sized organizations survive.
Naturally, everyone questions the worth of a new initiative. ERC is no exception. And for that matter, the refunded ERC amounts surprise many business owners. One can easily get his hands on thousands of dollars. On average, every employee receives a lump sum of 26K$.
For the taxes incurred in 2020, the ERCs constitute 50% of the first of 10K$ qualified wages. However, on the individual level, the credit refunds an amount of $5K for each employee.
But, the policies took a new turn in 2021. According to these expansions, the credit now refunds 70% of the first 10K$ of qualified wages. The number of benefiting employees also increased from 100 to 500. And the amount of benefitting credit increased up to 21K$ for each employee.
The required reduction in gross revenue as per the 2020 ERC policy was 50%. It confused the employers whose gross revenue didn’t fall below the required level. The despair ends here as the policies change in 2021. Now you only need a 20% drop in the gross revenue for the credit’s qualification.
For the sake of understanding, you can imagine comparing the quarterly gross receipts in the pre-pandemic year, when your trade or business was booming. Although, not all businesses have worse revenues. But, the lowering of the qualifying threshold helped a larger number of businesses to qualify for the credit. It is one of the biggest myths about ERC and now debunked!
There are two ways to qualify for the Employee Retention Credit. Although primarily, businesses qualify based on their gross reduction. But another qualifying metric is also available, and it’s the business impact.
We are all aware of how lockdown conditions affect organizations. During the Covid-19 phase, if you had to change your business activity calendar. Or, somehow, the planned business operations had to be postponed. Then your business qualifies. That’s what qualifying on business impact means.
If you are still lingering over the logic, answer the questions below to clear up the idea.
The ‘YES’ answers are leveling up your qualification probability!
Note: Any organization, private or tax-exempt, can qualify for the credit if it has a positive answer to the above questions.
The best part of ERC is it works with PPP loans as well. Even if your business is taking loans, but the pandemic conditions influenced it, you are still eligible for the ERC.
Since things get twisty and tricky here, you’ll need expert advice. You can consult a professional, and he will propose an effective strategy. Every tax year has an apex and a low tide. Consulting the experts will help you understand the best time for availing of the ERC and the PPP loans. Moreover, you’ll have more qualifying wages as the PPP loans cover about 14% of non-payroll taxes also.
There is one powerful way to solve the delayed application issue. You can simply file an amended 941-X form for the pandemic years 2020 and 2021. The form refunds the quarter receipts in 2020 and the prior years.
Filing the 941-X form covers your back even if your business doesn’t qualify for the ERC. It is always a wise choice to file the form than giving up the chance of availing yourself of a handsome refund.
The next most common myth about Employee Retention Credit is that people think of it as another refundable tax credit. However, contrary to the misbelief, it’s not a credit. But real cash. You can file for an ERC and receive a fat cheque or stacks of paper money accordingly.
Eventually, you can’t help but appreciate Congress’s worthy move to save the pandemic-affected businesses. The ERC doesn’t work on refunds. Therefore there is no fear that the money may run out before reaching your end of the queue. All you have to do is file a case and the check will arrive via mail.
Misguidance is nothing less than a curse, and unfortunately, many businesses become its target. About 50% of the businesses are not aware of their qualification. Whereas the credit’s sole purpose is to help the pandemic drained businesses.
Since not every business advisor isn’t an ERC expert, hiring a professional will help see the big picture. There are countless experts online and offline waiting to help you make your way through. Availing of their services and expertise is better than suffering from irreparable economic damage.
The pandemic didn’t only affect the educational institutes, but it also had adverse effects on businesses, and unfortunately, small organizations took the hardest blow. Therefore, Congress made some efforts to counter the incurred losses by introducing ERC.
Its policies, during the past years, have evolved to benefit more and more businesses. But, not every sort of adviser will help you avail of the ERC. Ignorant advisors are the main cause why so many businesses are unable to benefit from the initiative. When determining if a business is fully or partially suspended, facts and circumstances must be considered. Therefore, you must only consult a professional.
Learn how to qualify and claim your Employee Retention Credit by clicking here.