The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while either shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within those dates.
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In this post, we are going to discuss the Employee Retention Credit, what is, does it matter to your business and what should you do if you qualify. We are also going to discuss what to do if you recently applied and someone told you that you were ineligible to claim it.
Without further ado, let’s dive in!
Key Takeaways
- The ERC is a tax credit for businesses that experienced interruption or loss of business due to the COVID-19 pandemic.
- The ERCs original deadline has been extended, which means you can still take advantage of the tax credit. The eligible quarters are from March 2020 to December 2021.
- In order to qualify for the ERC you need at least five employees, been in business before February 15, 2020, and experienced a loss in revenue during the timeperiod.
What is ERC and How Does It Work?
The ERC is a refundable tax credit against certain employment taxes. It’s designed to help businesses retain their employees during periods of significant disruption, such as the COVID-19 pandemic. The credit was established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, but has been extended and modified several times since then.
For a bike shop owner, here’s how it works:
- Eligibility: To be eligible for the ERC, you need to have experienced either a significant decline in gross receipts (typically by more than 20% in a quarter compared to the same quarter in 2019) or have been subject to a full or partial shutdown order by a governmental authority due to COVID-19.
- Credit Amount: The amount of the credit is a percentage of qualified wages paid to employees during the period of disruption. The percentage has varied over time, but as of my knowledge cutoff in September 2021, it was 70% for the first $10,000 of an employee’s wages per quarter. So, the maximum credit per employee per quarter would be $7,000.
- Qualified Wages: The definition of qualified wages depends on the average number of full-time employees you had during 2019. If you had more than 100, only wages paid to employees for the time they were not providing services are considered. If you had fewer than 100, all wages paid to employees during the eligibility period are qualified, whether the employees were working or not.
- Claiming the Credit: To claim the ERC, you must report your total qualified wages and the related health insurance costs for each quarter on your employment tax return (typically Form 941). If your employment tax deposits are not enough to cover the credit, you may receive an advance payment from the IRS by submitting Form 7200.
- Recapture: If you take an ERC and subsequently receive a Paycheck Protection Program (PPP) loan, you may have to pay back some or all of the ERC. This is because you cannot double-dip and get both the PPP and ERC for the same wages.
If this all sounds too complicated, you are in the right place. The Bike Collective can help your bike shop file the ERC on your behalf. We will handle the entire process from preparing the forms to filing with the IRS. If you have any questions or want to learn more about the free program we offer read the rest of this article to find out.
How Do You Receive ERC Money?
The short answer is simple – file a form, get a check. However, filing the ERC is often more complicated than that. The ERC is a complicated tax credit that requires payroll and financial information to determine your eligibility as well as your final credit amount. Generally speaking, it is better to have a firm that has an understanding of the ERC to file on your behalf.
The ERC is a complicated claim for credit and requires multiple variables of your business finance to determine eligibility. Once the form is submitted the IRS will review your claim and determine whether you are eligible. If the IRS finds that you are eligible for the ERC, they will issue a check from the United States Treasury.
Who Qualifies For ERC?
To qualify for the ERC, your shop must have experienced either a significant decline in gross receipts or a full or partial shutdown due to a government order. Specifically, for the ‘gross receipts’ test, your quarterly revenue needs to have dropped by at least 50% compared to the same quarter in 2019. For the ‘government order’ test, your shop should have been partially or fully suspended due to COVID-related orders from a governmental authority.
Remember, every cog in your financial wheel counts when it comes to maintaining a healthy cash flow and keeping your shop pedaling forward, so be sure to consult with us to understand if your shop qualifies for the ERC.
What Has Changed About The ERC In 2023?
The ERC has seen a series of amendments since its introduction in 2020 as part of the CARES Act. The initial incarnation of the ERC allowed businesses with up to 100 full-time W2 employees and unlimited part-time W2 employees to be eligible. This cap increased to a maximum of 500 full-time W2 employees in 2021. The Consolidated Appropriations Act that came into effect on January 1, 2021, made employers who had taken PPP loans in 2020 or 2021 eligible for the ERC.
In 2023, a notable shift is how employee hours factor into eligibility. Businesses must show their employees have worked a specific number of hours during the pandemic to qualify for this tax credit, highlighting the need for accurate record-keeping of these hours.
Moreover, for businesses to qualify for the tax credit, they must demonstrate they paid out wages during the pandemic in 2020 and 2021. The IRS has specific guidelines on what constitutes wages eligible for the ERC, thus it’s critical to familiarize yourself with these regulations and ensure your payroll records are in order.
Eligibility thresholds have also come into play, which involve factors such as gross receipts and business size. These thresholds could change annually or due to new legislation, so staying updated on these details is crucial.
The ERC for 2023 is actually a retroactive claim for 2020 and 2021, and the most recent changes allow you to claim the ERTC even after taking PPP loans and having them forgiven.
For the tax year 2021, the ERC calculation method shifted to a percentage of qualified wages and health care costs paid by eligible employers during the applicable period. This change aimed to provide greater relief for businesses adversely affected by the pandemic and incentivize them to retain their employees.
Finally, qualified wages are typically those paid to employees not working or working reduced hours due to COVID-19. Employer-paid health care costs on behalf of employees can also be included when calculating your eligible expenses for the credit. Therefore, keeping accurate records and documentation of all qualifying expenses is crucial to maximize your credit claim.
Final Thoughts
The Employee Retention Credits (ERC) has been a lifeline for bike shops, especially during periods of economic downturns, where retaining skilled staff has been critical to continued operations and recovery. These tax credits can greatly ease financial pressures, allowing these businesses to keep employees on their payroll and maintain a level of service despite possible fluctuations in demand.
However, to maximize the potential benefits, bike shops must stay aware of eligibility criteria and reporting requirements. Misunderstanding or lack of knowledge about the specifics of the ERC can lead to missed opportunities for financial relief. The system could be made more user-friendly to assist small businesses that may not have the resources to interpret complex tax laws.
Overall, the ERC is a beneficial tool for maintaining employment and ensuring business continuity. Yet, it could be improved by simplifying the application and comprehension process, making it more accessible for small, local bike shops.
