Employee retention credit application

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Page written by Michael David. Last reviewed on October 9, 2024. Next review due October 1, 2025.

The Employee Retention Credit can be worth up to $7,000 per employee per quarter to your small business. Here’s a look at who’s eligible and how to apply.

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Your ERC application summarized

Here’s a general overview of the ERC application process:

Determine whether your business is eligible for the ERC. Eligibility is based on factors such as a significant decline in gross receipts or a full or partial suspension of business operations due to government orders.
Calculate the qualified wages for each eligible employee. The calculation depends on the size of the employer and the period in which the wages were paid.
Collect documentation to support your ERC claim. This may include payroll records, financial statements, government orders that led to a suspension of operations, and other relevant documentation.
Include the ERC information on your payroll tax return (e.g., Form 941). Report the qualified wages, calculate the credit, and offset the credit against the employer’s share of Social Security taxes. Any excess credit can be claimed as a refund. If you did not do this using Form 941 in 2021 or earlier, you may be abe to do it retroactively using Form 941-X.

It is recommended to retain the documentation related to the ERC claim in case there is an IRS audit or inquiry in the future. You may also wish to consult with a tax professional who can provide guidance on eligibility, calculations, and the application process.

How to take advantage of the ERC scheme

To take advantage of the ERC, it is critical that you meet the qualifying criteria. To qualify for the ERC, you must meet one of the following criteria:

Your business was fully or partially shut down by government order in 2020 or 2021
Your gross receipts for a single quarter of 2020 fell by 50% versus the same quarter of 2019
Your gross receipts for a single quarter of 2021 decreased by 20% versus the same quarter of 2019 (or 2020, if you were not in business in 2019)

According to the IRS website, some taxpayers and organizations are not eligible to claim the Employee Retention Credit, including:

Individual taxpayers who are not business owners
Employees
Retirees
Self-employed individuals who do not have employees
Household employers
Employers that didn’t pay wages to employees during the qualifying time periods
Employers who experienced supply chain disruptions but did not experience a full or partial suspension of operations by a qualifying order
Government agencies

As of 2023, in most cases, ERC eligibility for wages paid after September 30, 2021 has expired. However, businesses can still file for a retroactive ERC refund using Form 941-X. This form can be used to adjust employment taxes filed within three years of the original return or two years from the date the employer paid the tax. This retroactive refund is only available for the 2020 tax year as well as the first three quarters of the 2021 tax year.

The ERC application process

The only way to claim the ERC was on a federal employment tax return using Form 941 while the program was active, or Form 941-X now that the program is no longer active. While it is wise to seek the assistance of a qualified tax professional, be cautious when it comes to advertisements claiming that they can help you apply for the ERC, as any incorrect claims will need to be repaid with penalties and interest.

Key considerations for your application

The most important consideration for your ERC application is to make sure that your business qualifies. You must meet at least one of the following two criteria:

Business shutdown. Your business was fully or partially shut down by a local, state, or federal government order in 2020 or 2021.
Revenue decline. Your gross receipts for a single quarter of 2020 fell by 50% versus the same quarter of 2019, or your gross receipts for a single quarter of 2021 decreased by 20% versus the same quarter of 2019 (or 2020, if you were not in business in 2019).

If one or both of these conditions is met, then you have the opportunity to document the amount of qualified wages that were paid to employees during the application periods and apply for a refund of applicable payroll taxes.

Paid W2 Employees

The ERC is a refundable payroll tax credit that is available to employers who retain their W2 employees by keeping them on the payroll. If you are eligible, you may receive a credit of up to 70% of each employee’s qualified wages for 2021 and up to 50% of each employee’s qualified wages, up to $5,000 for 2020.

You paid full or part-time wages for W-2 employees (excluding family members or owners) during the 2020/21 period

The ERC is designed to refund payroll taxes related to what are called “qualifying wages.” These are the full or part time wages paid to W-2 employees (excluding family members or owners) during the 2020/21 period.

Decreased revenue in 2020/21

If an employer qualifies for the ERC based on a significant decrease in revenue during 2020/21, then the qualifying wages from that period can be part of the ERC claim, even if the business continued its operations.

Suspended operations throughout the 2020/21 period

If an employer qualifies for the ERC due to a government-mandated suspension of operations, all wages paid during the suspension period are generally considered qualifying wages.

The government orders leading to the suspension must be issued at the federal, state, or local level. These orders might include closures, stay-at-home orders, restrictions on business operations, or other measures that directly impact the ability of a business to continue its normal operations.

How Swoop can help

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Written by

Michael David

Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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