As the world continues to recover from the economic downturn caused by the global pandemic, startups face unique challenges in attracting and retaining talented employees. The government introduced the Employee Retention Credit (ERC) to support these businesses. It’s a valuable incentive that provides financial relief and encourages employee retention.
In this blog post, we’ll explore the significance of the ERC for recovery startup businesses. We’ll outline its key features and benefits while shedding light on how it can positively impact growth and sustainability.
Understanding the Employee Retention Credit
The Employee Retention Credit is a tax credit established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Its purpose is to help eligible employers, including recovery startup businesses, retain and pay their employees during economic uncertainty. The credit is designed to reduce the financial burden on employers, allowing them to focus on business recovery and expansion efforts.
Qualifying for the Employee Retention Credit
To qualify for the ERC, recovery startup businesses must meet specific criteria. Generally, eligible employers fall into one of two categories:
- Businesses that experienced a significant decline in gross receipts: If a recovery startup’s gross receipts decreased by more than 50% compared to the same calendar quarter in the previous year, they might qualify for the ERC.
- Businesses that faced full or partial suspension due to government orders: If a recovery startup’s operations were fully or partially suspended due to government orders, they are eligible for the credit, regardless of the decline in gross receipts.
What Can a Startup Business Claim?
The ERC for 2020 is 50% of all qualified wages you paid your employees from March 12, 2020, to December 31, 2020. There’s a limit of $10,000 in wages per employee for each quarter and a maximum claim amount of $5,000 for 2020.
For 2021, the available credit is for 70% of qualified wages you paid your employees from January 1, 2021, to September 30, 2021. There’s a set limit of $10,000 in wages for each employee for any quarter.
This means you can claim up to $7,000 per employee per quarter. The maximum allowed credit is $21,000 for each employee.
However, If your business is deemed a recovery startup business, the total credit allowed is $50,000 per quarter. In addition, any wages you paid through December 31, 2021, are eligible.
The Benefits of the Employee Retention Credit
The ERC offers four substantial benefits for recovery startup businesses, aiding their financial recovery and helping the retention of skilled employees:
- Tax credit against employment taxes: The ERC provides a refundable tax credit for startup businesses. There are several tests to ensure that a startup is eligible as a recovery startup for these ERC.
The first one is that the business started on or after February 15th, 2020, when COVID hit the United States. The second one is that the company must have had an average of $1 million or less yearly gross receipts. Third, you have one or more W-2 employees, not including owner-operators or family members.
If the business qualifies as a startup, This credit can be claimed against the employer’s share of Social Security taxes, helping reduce tax liabilities and freeing up capital for business operations.
- Retroactive and prospective benefits: Recovery startup businesses that missed out on claiming the ERC in 2020 and 2021 can retroactively claim it for qualified wages during that period. Moreover, the credit was extended through 2021, which allowed startup businesses to continue benefiting from this financial incentive.
- Cash infusion and liquidity support: The ERC can provide a significant cash infusion for eligible employers, especially for startups that have experienced financial difficulties. These funds can be used for various purposes, such as meeting payroll obligations, investing in growth opportunities, or addressing other financial obligations.
- Enhanced employee retention and morale: By utilizing the ERC, recovery startup businesses can demonstrate their commitment to retaining employees during challenging times. This, in turn, boosts employee morale, encourages loyalty, and fosters a positive work environment, which is essential for long-term success.
The Employee Retention Credit serves as a lifeline for recovery startup businesses, offering crucial financial relief and incentivizing the retention of talented employees. By taking advantage of this tax credit, startups can ease their financial burdens, strengthen their cash flow, and focus on rebuilding and expanding their operations.
Calculations and rules can be complex, so iconsultingERC tax experts for help makes sense. Our team of experts at Bottom Line Concepts is ready to help your startup recovery business claim this valuable tax credit. Contact us today for your no-cost, no-obligation 15-minute discovery call to confirm your ERC eligibility.