Employee Retention Credits -The Credits Practices Are Overlooking
The Covid-19 pandemic has been the single biggest trial for business owners in recent history. The ever-evolving benefits, regulations and restrictions have left many of us with whiplash. It’s no wonder many practice owners are uncertain if they used all the available small business relief provisions.
If you are a practice owner, you should be uncertain because you have likely overlooked one of the biggest opportunities to claim cash that can be used in your business.
How much cash could you save with the Employee Retention Credit?
Our low estimate for a two-doctor practice with 8 support staff is $75,000.
Yes, I said "low estimate"!
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a 2020 & 2021 refundable payroll tax credit for eligible businesses that meet one of the following tests:
- Fully or partially suspended operations during the calendar quarter due to orders from an appropriate governmental authority, OR
- Experienced a significant decline in gross receipts of:
- For 2020: 50% of gross receipts compared to the same quarter in 2019
- For 2021: 80% of gross receipts compared to the same quarter in 2019
Additionally, businesses may qualify for the ERC under the Recovery Startup Business provisions. To be considered a recovery startup business, it must:
- Have started its trade or business activities after Feb. 15, 2020, and
- Have average annual gross receipts of $1 million or less
These tests are applied to each quarter to determine eligibility.
How much are the Employee Retention Credits?
$5,000 per employee - for 2020 the maximum available credit is 50% of up to $10k of eligible wages for each qualified employee for the year.
$7,000 per employee - for 2021 the maximum available credit is 70% of up to $10k of eligible wages for each qualified employee for each quarter.
Recovery Startup Businesses are eligible to qualify for a maximum available credit of 70% on up to $10k of eligible wages for each qualified employee not to exceed $50,000 for the third and fourth quarters of 2021.
If you do some quick math an employee with wages of $40,000 a year has the potential for $33,000 in total employee retention credits.
How does a business claim the Employee Retention Credit?
The Employee Retention Credit (ERC) is claimed on the Form 941: Employer’s Quarterly Federal Tax Return.
For past eligible quarters with 941s already filed, amended Form 941s (941-X) returns will need to be completed.
For current & future eligible quarters the credits can be estimated, payroll taxes kept in the business and then reconciled on the Form 941 each quarter.
What happens if a business received PPP (Paycheck Protection Program) Loans?
The original ERC provisions created by the CARES Act of 2020 excluded PPP Loan recipients from utilizing the ERC. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), enacted December 27, 2020, and the American Rescue Plan Act of 2021 (ARP Act), expanded the eligibility of the credits to PPP Loan recipients.
If you got a PPP (Paycheck Protection Program) loan you now can also claim employee retention credits.
Is the Employee Retention Credit free money?
No, the ERC is a reduction in wage expenses in the year claimed. This can be a surprise at tax time but let's look at the benefit with an example.
Let’s say VetCo receives that $75,000 in credits for 2021. VetCo would then reduce their 2021 wages expense by the $75,000 effectively increasing their taxable income for the year by the credit amount. VetCo has an effective tax rate of 25% creating an increase in taxes of $18,750. Leaving VetCo with $56,250 cash in their pockets to do with as they wish.
I don’t know about you, but I like free money regardless of if I must pay taxes on it.
What businesses are likely eligible to claim the Employee Retention Credit?
In person service or product industries that were subject to governmental orders that created partial or fully reduced operations or capacity. Examples: dentistry, veterinary, non-essential medical, restaurants, bakeries, etc.
- Businesses that took PPP loans and haven't looked at the expanded provisions for eligibility.
- Businesses that didn't qualify for the 2nd PPP Loan due to the gross receipts test of 25% but have declines in gross revenues for 2021.
- Businesses who started up in 2020 or 2021.
Are you convinced this is something you should investigate for your business? Good, because I think so too.
Here are your next steps:
- Determine if your business is eligible for the ERC.
- Calculate your credits.
- File the proper reports to claim the credits.
- Amend any additional required filings.
- Wait for the IRS to write you those checks!!
Need help with the ERC program? I’ve got two resources for you!
I made a simple, free estimator so you can get an idea how much you might receive from the ERC program.
If you want us to do all the work for you – sign up for our ERC Credit Analysis & Filing Services.