If your business suffered from shutdowns or saw a big drop in gross receipts during the COVID-19 pandemic, you might qualify for the Employee Retention Credit (ERC). The ERC tax credit is a cash payment from the IRS that alleviates some of the burden of payroll taxes.
Many business owners haven’t claimed this refundable tax credit because they’re unsure how to apply or don’t know whether they even qualify. Here is more about how to claim this valuable tax credit.
How To Claim the ERC
Claiming the ERC isn’t too complicated, but it’ll require some work to determine whether your business qualifies. Here’s how you can claim the ERC tax credit.
Determine Whether You’re Eligible
Before you apply, you need to know whether your business qualifies for the credit as an eligible employer. You’ll have to meet one of the following two requirements:
- The government ordered your business to shut down, either partially or totally, for a certain period. For instance, let’s say you own a bar. In March 2020, your city made you close your indoor seating area, restricting customers to outdoor seating. This qualifies as a partial shutdown.
- You had a serious drop in gross receipts for at least one quarter. For 2020, you must have had at least a 50% decline in your gross receipts compared to the same quarter in 2019. If you want to claim the credit for 2021, you’ll need at least a 20% drop in gross receipts.
What if your business took a Paycheck Protection Program (PPP) loan? Originally, the IRS didn’t allow such businesses to claim the ERC tax credit. However, it has since lifted that restriction, which means you can apply for the credit even if you took a PPP loan.
Calculate Your Qualified Wages
Next, you’ll need to calculate your business’s qualified wages. Qualified wages are those you paid to employees kept on payroll in 2020 or 2021. Payments you made for employee health care plans also count toward qualified wages.
The 2020 credit is equal to 50% of qualified wages, with a limit of $10,000 per employee for all quarters. In 2021, the credit increased to 70% of qualified wages. The IRS sets a limit of $28,000 per employee for the year.
File Form 941-X
Once you’ve gathered all the necessary information, it’s time to fill out and file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. On this form, include all qualified wages paid to employees, plus health plan costs paid by you.
If you’re eligible for the ERC in the third or fourth quarter of 2021 solely because you own a recovery startup business, check box 31b. A recovery startup business is one that:
- Opened its doors on or after February 15, 2020
- Had annual gross receipts of less than $1 million for the previous three years
After completing the form, you may opt to carry the ERC forward to succeeding years or quarters. You’ll also need to provide a detailed explanation of how you made your adjustments on the form.
Contact Us if You Need Help Claiming the ERC
If you’d like to claim the ERC, reach out to Dayes Law Firm PC at (866) 257-1223. We’ll explain whether you qualify and help you claim the ERC tax credit if you do.