What is the Employee Retention Credit and Does my Business Qualify?

Running a business is no easy task. Add a global pandemic to the mix and it becomes exponentially more stressful and difficult. The COVID-19 pandemic caused over 200,000 small businesses to permanently close up shop, and even more had to deal with partial closures and other coronavirus-related setbacks. 

In response, the government created the Employee Retention Credit as a stimulus and relief package that encourages businesses to keep employees on their payroll. 

Are you unsure whether or not your company qualifies for the ERC? Read on to learn more about this tax credit and how your business can take advantage of it.

What is the ERC?

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. The goal of the CARES Act was to stimulate the economy and keep small businesses afloat. 

Included in the CARES Act was the Employee Retention Credit (ERC), which is a refundable payroll tax credit created to incentivize employers to keep their employees on their payroll. 

In December 2020, the ERC was expanded to include more businesses. Qualifying companies can use the ERC against some employee payroll taxes. 

How do you qualify?

In order to be eligible to receive the ERC, your business must have:

  • Fewer than 500 employees
  • Kept employees on the payroll
  • Fully/partially suspended operations due to government orders OR
  • Experienced a reduction in year over year gross receipts of 50% in 2020 or 20% in 2021

Relationship with PPP Loans

Even if you already took advantage of a Paycheck Protection Program (PPP) Loan, the ERC has now retroactively expanded to taxpayers who borrowed a PPP Loan. However, only payroll tax credit on qualified wages paid in excess of the payroll costs used on the PPP Loan Forgiveness Application can be obtained. 

E.g. In 2020 you incurred $150,000 in wages, and received a $100,000 PPP Loan. On the PPP Loan Forgiveness Application you then reported $100,000. Because only $50,000 is not covered by the loan, you may only receive ERC on $50,000.

Cloud Bookkeeping

The intricacies of taxes can be confusing. If you don’t think your business fits the guidelines to claim the ERC, or if you have other questions, talk to our certified financial team at Cloud Bookkeeping to explore your options. You may still have a chance to receive the ERC tax credits. 

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