Employee Retention Credit 2021: Explained For Small Business Owners

Did you know that 99.9% of all businesses in the US qualify as small businesses? Collectively, they employ 47.3% of the nation’s private workforce. And, they’ve been the hardest hit during the COVID-19 pandemic.

Compared to January 2020, 34% of small businesses are still closed. That’s a staggering statistic for the millions of hard workers in the US who struggled and strived to build their dreams from the ground up. However, there’s good news!

If you are a small business impacted by the pandemic, you could have qualified for financial relief through the 2021 Employee Retention Credit. And, honestly, there still might be time. Before we explain how you can qualify, let’s discuss the employee retention credit and how it can help your business.

What is the Employee Retention Credit 2021?

The Employee Retention Credit (ERC) is a refundable tax credit given to businesses. It was created as part of the CARES Act in March 2020 to help support small businesses in the wake of the COVID-19 pandemic. The goal was to help them receive the funds they needed so that they could continue paying their employees and avoid layoffs. 

Under the American Rescue Plan, the ERC was extended through the end of 2021 to give businesses more time to claim the credit. Currently, as the IRS notes, the Employee Retention Credit applies to qualified wages paid after March 12, 2020, and before January 1, 2021.

How Do I Qualify For the 2021 Employee Retention Credit?

There are three main ways businesses qualify for the 2021 ERC:

  • A business experienced a full or partial suspension of operations due to a governmental ordinance limiting its business activities.
  • If a business’ gross receipts (income) are down 80% in any quarter compared to the same quarter in 2019.
  • If you are a recovery startup business– defined as a company that started after February 15th, 2020, with no more than $1m in gross receipts for the three years prior to claiming the credit.

Employee Retention Credit Amounts for 2021

In a world where employers are being cost-competitively outbid by those who can undercut them on wages, it's no wonder that many have found the Employee Retention Credit to be their saving grace. 

This refundable tax credit is worth up to 50% of qualified wages paid after March 12th, 2020 and before January 1st 2021. And that could amount to thousands in savings. It really depends on how often your company pays its employees. The maximum amount taken into account per employee is $10k. This means at the rate of 50%, you can receive a credit of up to $5,000 per employee.

What Are Qualified Wages?

What is considered qualified wages varies according to the size of a business. Here are the current ways qualified wages are defined for small and large companies: 

  • Small businesses (less than 100 full-time employees): Qualified wages are all wages and health plan expenses paid for by the employer during a particular quarter.
  • Large businesses (more than 100 full-time employees): Qualified wages are only wages and health plan expenses paid out by the employer during periods that the employee did not perform services for the employer (for example, due to pandemic-related suspensions or layoffs). 

When Will I Receive My Employee Retention Credit?

Many businesses are still waiting for their ERC refund checks, unfortunately, but that doesn’t mean they’re not coming. Due to massive demand and staffing shortages, the IRS has a backlog of ERC requests. In some cases, it can take up to six months to receive your credit. This is why it's best to apply as soon as possible.

That being said, businesses can immediately benefit from the ERC. How? By decreasing the amount of estimated employee taxes payments they are required to send to the IRS. Keep this in mind as Tax Season 2022 approaches for any business earnings and losses in 2021.

Final Thoughts

The deadline to apply for the ERC was December 31st, 2021. However, there might be extensions. You can check here and also browse through the IRS’ list of frequently asked questions.

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