How to Qualify for the Employee Retention Credit

If you’re just starting your business, you must do everything possible to set yourself up for success. One way to do that is by taking advantage of employee retention credit; your business must meet specific requirements.

Here is what you need to know about the credit and how to apply.

Check if you are eligible

To qualify, you must have paid qualified wages to certain W-2 employees (excluding owners) during the applicable period.  Additionally, your business must operate before February 16, 2020.

2020 Eligibility

To qualify, your business must meet specific requirements. Your business operations were fully suspended in 2020 due to a government order.

A decline of 50% in gross receipts when comparing the corresponding quarters in 2020 and 2019. If your business did not operate in 2019, you could still rely on 2020 for credit purposes.

2021 Eligibility

In 2021, credits will be provided to businesses affected by the government’s order to be fully or partially suspended.

To qualify for ERC, you must see a decline of 20% in gross receipts when comparing corresponding quarters in 2021 and 2019.

What if you open in 2020 or, even better 2021?

You will automatically qualify for quarters three and fourth for the 2021 year.

So what is the catch? Your business’s Initial Filing Date must be after February 2020; the gross didn’t exceed one million dollars.

How Do I Know Tax Credit Worth?

2020 Credit: From March 13, 2020, through the end of the year, each of your employees can claim up to $5,000 in refunds if eligible. This equates to 50% of qualifying wages up to $10,000.

2021 Credit: Qualifying employees may be entitled to 70% of their wages (up to $10,000 per quarter) if paid between January 1, 2021 and October 1, 2021.

Over three quarters up to September 30, 2021, companies can receive a maximum amount of $21,000 per employee.

The credit is available for two years, beginning when the employee performs services for the employer.

Over 2 years, each employee can receive up to $26,000. We encourage you to take advantage of it to ensure your business can rebound when the pandemic ends.

Gather the necessary documentation

The credit is designed to help businesses retain employees during these difficult times. To take advantage of this credit, you must gather the necessary documentation.

These documents will be required to determine whether or not you are eligible for the credit. Furthermore, making sure these documents are accurate will help you receive the most credit possible:

  • Business Tax Returns (2019 – 2021)
  • Quarterly Financials (2019 – 2021) or your 1099K and Sales Reports in those years
  • 2019 – 2021 Quarterly Payroll Returns (Form 941, DE9, and DE9C) 
  • PPP Loan Statements (if applicable)
  • Quarterly Payroll Journals (2019 – 2021)

If you gather all the necessary documentation ahead of time, you can be sure that the process will go smoothly.

This way, you won’t have to worry about delays or anything else that could disrupt your plans.

Complete and submit the application

To claim the employee retention credit, employers must complete an application and submit it to the IRS.

The application will require information about the employer’s business, such as the employer’s EIN (Employer Identification Number) and the amount paid out in wages to employees over the past year.

The IRS will thoroughly review your application before making a decision.

They will consider many factors, including your financial situation and the type of tax return you filed.

Ultimately, they will determine whether or not you are eligible for a refund.

You can contact our tax pros if you have questions about the employee retention credit or how to apply.

Employee Retention Credit is requirement necessary.

Await approval or denial

The credit is not finalized until the IRS either approves or denies it. However, the IRS typically approves credits within a few weeks of receiving the necessary documentation.

Therefore, if you have filed for credit and have not yet received notification from the IRS, chances are good that your credit is still being processed.

Companies considering claiming credit should ensure they meet all the eligibility requirements and have documentation to support their claims.

Additionally, businesses should be aware that the credit may be subject to recapture if the business does not maintain its employee headcount or payroll levels.

The employee retention credit is an excellent way for businesses to save money and keep their employees during tough times.

However, it’s essential to ensure that all the requirements are met to avoid penalties or recapture.

If approved, follow instructions to begin receiving benefits

If your company is approved for the employee retention credit, you will need to follow specific instructions to start receiving benefits.

First, you must determine which employees are eligible for the credit. To do this, you will need to review each employee’s employment status and compensation history.

Once you have identified which employees are eligible, you will need to calculate the amount of credit your company is entitled to receive.

This calculation will take into account the number of qualified employees and the number of their respective wages.

After you have calculated the amount of the credit, you will need to claim it on your company’s tax return. Once you have followed these instructions and received approval from the IRS, you will begin receiving the employee retention credit.

If denied, appeal the decision

If the employee retention credit is denied for your business, you can protest the decision. The first step is to file a petition with the Board of Review.

This board will review the facts of your case and decide whether or not to overturn the original decision.

If the Board of Review decides, you can claim the credit retroactively. However, you can file a lawsuit in court if the Board denies your appeal.

You will need to provide evidence to support your case, and a judge will ultimately decide whether or not you are entitled to the credit. While appealing a denial can be time-consuming and expensive, it may be worth it if you can recover the credit.

Although the disability application process may seem daunting, you can increase your chances of approval by ensuring that you are eligible, gathering all required documentation, and completing and submitting the application correctly.

If you are denied benefits, don’t give up – you can appeal the decision. To stay up-to-date on changes in disability benefits and other important news, subscribe to our newsletter below.

Resources

XOA TAX only relies on the most reputable for information so that we can provide you with content that is as accurate and useful as possible. These include white papers, governments data, original reports, and insight from our experienced CPAs

FAQs: Employee Retention Credit under the CARES Act | Internal Revenue Service. (n.d.). Www.irs.gov. https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
COVID-19-Related Employee Retention Credits: General Information FAQs | Internal Revenue Service. (n.d.). Www.irs.gov. https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-general-information-faqs
COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs | Internal Revenue Service. (n.d.). Www.irs.gov. Retrieved November 29, 2022, from https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-how-to-claim-the-employee-retention-credit-faqs

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