The Employee Retention Credit (ERC) has been a crucial lifeline for many small businesses impacted by the COVID-19 pandemic. As a refundable tax credit designed to encourage businesses to keep employees on their payroll, the ERC has provided much-needed financial relief to struggling businesses.
However, some small business owners may not be aware of all the strategies available to them to maximize their ERC benefits. By understanding eligibility criteria, identifying qualified wages, meeting filing requirements and deadlines, considering the interplay with other COVID relief programs, and looking ahead to future tax planning, small business owners can make the most of this important relief program.
In this article, we will explore strategies that small business owners can use to maximize their ERC benefits, providing guidance on how to take full advantage of this critical program.
Understand Eligibility Criteria
To maximize benefits from the Employee Retention Credit (ERC), small business owners must first understand the eligibility criteria. The ERC is designed to encourage businesses to keep employees on their payroll during the COVID-19 pandemic, but not all businesses are eligible to claim the credit.
The eligibility criteria for ERC include the following:
- Business operations: To qualify for ERC, a company’s operations must either have been completely or partially halted as a result of COVID-19, or they must demonstrate that their gross earnings have significantly decreased. A full suspension of operations is defined as a complete cessation of business activities, while a partial suspension is defined as significant disruptions to normal operations.
- The number of employees: Eligible businesses can have up to 500 employees. However, if a business has more than 500 employees, it may still be eligible for ERC if it meets certain criteria.
- Qualified wages: In order for the company to be eligible for ERC, it is necessary for the employees to have been given qualified salaries. The amount of the credit that can be claimed and the size of the business both play a role in determining what constitutes “qualified wages.”
- Time period: The ERC is available for wages paid between March 12, 2020, and December 31, 2021.
Small business owners should review these eligibility criteria carefully to determine whether they qualify for ERC. It’s important to note that eligibility requirements can vary depending on the specific situation of the business, so it’s recommended that small business owners consult with a tax professional to determine their eligibility.
Identify Qualified Wages
Once small business owners have determined that they are eligible for the Employee Retention Credit (ERC), the next step is to identify qualified wages. Qualified wages are wages paid to employees during the eligible time period that meet the criteria for ERC.
There are two types of qualified wages that small business owners can claim for ERC:
- Wages paid while the business was fully or partially suspended: If a business was fully or partially suspended due to COVID-19, any wages paid during that period might qualify for ERC.
- Wages paid during a quarter of significant decrease in gross receipts: If a business did not experience a full or partial suspension of operations, it might still be eligible for ERC if it experienced a significant decrease in gross receipts. Qualified wages for this scenario are limited to $10,000 per employee per quarter.
It’s important to note that not all wages qualify for ERC. For example, wages paid to family members of the business owner or to owners of more than 50% of the business are not eligible for ERC. Additionally, qualified wages cannot include amounts that were forgiven under the Paycheck Protection Program (PPP).
Small business owners should review their payroll records carefully to identify qualified wages that meet the criteria for ERC. It may be helpful to consult with a tax professional or accountant to ensure that all eligible wages are identified and claimed correctly.
By identifying qualified wages, small business owners can ensure that they are maximizing their ERC benefits and receiving the financial relief they need to keep their businesses running during these challenging times.
Review Filing Requirements and Deadlines
After small business owners have determined their eligibility for the Employee Retention Credit (ERC) and identified qualified wages, the next step is to review the filing requirements and deadlines to ensure that they receive the credit in a timely manner.
The ERC is claimed on the employer’s quarterly federal tax return, which is Form 941. Small business owners must file Form 941 to claim the ERC for each quarter they are eligible for. If a business is claiming the ERC for the first time, it can also file an amended Form 941 for the relevant quarter(s) to claim the credit retroactively.
It’s important for small business owners to note that they cannot claim both the ERC and the Paid Leave Credit for the same wages. If a business has claimed the Paid Leave Credit for any wages, those wages are not eligible for ERC.
Additionally, small business owners should review the deadlines for filing Form 941. The deadline to file Form 941 for each quarter is the last day of the month following the end of the quarter. For example, the deadline to file Form 941 for the first quarter of 2022 (January 1 – March 31) is April 30, 2022.
Small business owners should also review the rules and regulations around ERC to ensure that they are in compliance and that they receive the maximum benefit from the credit. It’s recommended that small business owners consult with a tax professional or accountant to ensure that they are following all the guidelines and meeting all the requirements.
Consider the Interplay with Other COVID Relief Programs
Small business owners who are eligible for the Employee Retention Credit (ERC) should consider how this credit interacts with other COVID relief programs they may have received or applied for.
For example, if a small business received a Paycheck Protection Program (PPP) loan, any wages paid with PPP funds are not eligible for the ERC. However, any wages paid with other funds may still be eligible for ERC.
Small business owners who received a Shuttered Venue Operators Grant (SVOG) or a Restaurant Revitalization Fund (RRF) grant may still be eligible for ERC. However, the amount of ERC may be reduced if a small business has received these grants.
It’s important for small business owners to understand the interplay between ERC and other COVID relief programs to ensure that they are maximizing their benefits and avoiding any potential penalties or compliance issues. It may be helpful to consult with a tax professional or accountant to understand how these programs interact with each other.
In addition, small business owners should keep accurate records of all COVID relief programs they have received or applied for, as well as any qualified wages claimed for ERC. This documentation will be important in case of any audits or compliance checks in the future.
By considering the interplay with other COVID relief programs, small business owners can ensure that they are receiving the maximum benefit from all available programs and are in compliance with all rules and regulations.
Look Ahead to Future Tax Planning
Small business owners who have claimed the Employee Retention Credit (ERC) should look ahead to future tax planning to ensure that they are maximizing their tax benefits and minimizing their tax liabilities.
One key area of future tax planning is to consider the impact of the ERC on future tax years. The ERC is a fully refundable tax credit, which means that if the amount of the credit exceeds the employer’s payroll taxes, the excess will be refunded to the employer. However, this refund may be subject to income tax in future tax years. Small business owners should consult with a tax professional or accountant to understand the tax implications of the ERC and how it may impact their future tax liabilities.
Another area of future tax planning is to consider the impact of any changes to tax laws or regulations on their business. Small business owners should stay informed about any changes to tax laws and regulations that may affect their business and plan accordingly. For example, changes to the tax code may impact the eligibility criteria for the ERC or the amount of credit a business can claim.
Small business owners should also consider other tax planning strategies, such as maximizing deductions and credits and adjusting their payroll tax withholding to avoid underpayment penalties.
By looking ahead to future tax planning, small business owners can ensure that they are maximizing their tax benefits and minimizing their tax liabilities and are prepared for any changes to tax laws or regulations that may impact their business. It’s recommended that small business owners consult with a tax professional or accountant to ensure that they are following all the guidelines and meeting all the requirements.
Conclusion
In conclusion, small business owners who are eligible for the Employee Retention Credit (ERC) should take proactive steps to maximize their benefits. By understanding the eligibility criteria, identifying qualified wages, reviewing filing requirements and deadlines, considering the interplay with other COVID relief programs, and looking ahead to future tax planning, small business owners can ensure that they are maximizing their tax benefits and minimizing their tax liabilities.
Claiming the ERC can provide significant relief for small businesses during these challenging times, but it’s important to follow all the guidelines and meet all the requirements to avoid any penalties or compliance issues. Small business owners should consult with a tax professional or accountant to ensure that they are following all the rules and regulations and are in compliance with all tax laws. With careful planning and attention to detail, small business owners can maximize their ERC benefits and set their businesses up for success in the future.
