Utilizing the Employee Retention Credit to Offset Payroll Costs
Understanding the Employee Retention Credit
The Employee Retention Credit (ERC) was introduced in 2020. It is part of the CARES Act. The initiative aims at assisting businesses during the COVID-19 pandemic. The ERC is a fully refundable tax credit for employers equal to 50% of qualified wages. Though employers must be eligible it includes allocable health plan expenses for employees. This limit was increased to 70% in 2021 with a cap of $10,000 in qualified wages per employee per quarter. As a result, businesses have an opportunity to reduce their payroll costs significantly. By taking advantage of this provision.
The ERC was designed to encourage businesses to keep employees on their payroll, even if they cannot currently work due to the effects of the pandemic. It applies to businesses of all sizes, but the specifics may vary depending on the company’s situation. For instance, the determination of whether a business is “small” or “large” will affect how much of the wages paid to employees are qualified wages.
Determining ERC Eligibility and help Payroll costs
ERC eligibility is contingent on specific conditions. Primarily, the business must have experienced either a full or partial suspension of operations due to governmental orders related to COVID-19, or a significant decline in gross receipts in a calendar quarter when compared to 2019.
If your business was still in the planning stages in 2019 and you held off because of the pandemic it’s still possible to access federal funds. Several different programs similar to ERC were initiated. By the Small Business Administration for just such a purpose. Most of these programs have now been shut down. But a few still have discretionary budget funds they can expend. Ask your Congressperson about these.
The IRS has provided guidance on what constitutes a “significant decline,” typically a 50% reduction in gross receipts when compared to the same quarter in 2019. However, beginning in 2021, this threshold was reduced to a 20% decline. If the business’s operations weren’t suspended, the credit is available only for wages paid to employees who are not providing services due to the decrease in gross receipts.
Calculating and Claiming the ERC
To calculate the ERC, first determine the amount of “qualified wages” paid to each employee during eligible quarters. The definition of “qualified wages” depends on the average number of full-time employees you had in 2019. For small businesses (under 100 employees in 2019, raised to under 500 in 2021), all wages paid to employees during the affected period can qualify. Whether the employees are working or not. For larger businesses, only the wages paid to employees for the time they are not providing services may qualify.
To claim the ERC, report the total qualified wages and related health insurance costs for each quarter on your quarterly employment tax return. Typically Form 941. If your employment tax deposits are not sufficient to cover the credit, you may receive an advance payment from the IRS by submitting Form 7200. Also, consider consulting with a tax professional to ensure you are claiming the credit correctly.
Strategies to Maximize the ERC
One key strategy for maximizing the ERC is to maintain a robust record-keeping process. Having comprehensive, well-documented records can help businesses demonstrate their eligibility for the ERC and substantiate the amount of credit claimed. This includes documentation supporting the full or partial suspension of operations or the significant decline in gross receipts, as well as records of the wages paid to employees during the eligible periods.
It’s also possible to take a tax deduction for increased accounting costs due to ERC red tape. The added documentation needed can sometimes be written off. You should consult with a qualified CPA about this matter if you think it can affect your bottom line.
Another strategy is to stay informed about changes to the ERC and related legislation. As the ERC was extended and modified several times in response to the evolving economic impact of the pandemic, being aware of these changes can help businesses take full advantage of the credit.
Conclusion: A Powerful Tool for Reducing Payroll Costs
The Employee Retention Credit is a powerful tool for businesses looking to offset their payroll costs during these challenging times. By determining their eligibility, calculating and claiming the credit correctly, and employing strategies to maximize the ERC, businesses can greatly reduce their payroll costs and improve their financial stability. However, as this is a complex area of tax law, it is advisable to consult with a tax professional. To ensure the appropriate and beneficial use of the ERC.