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Employee Retention Credit (ERC): How to Qualify

Does my business qualify for the Employee Retention Credit and how much credit can I get from the IRS?

The Employee Retention Credit (ERC) was created as an incentive to encourage businesses to keep their employees employed even when the business fell below normal operational hours and transitioned into partial shutdown. Due to the implementation of the Consolidated Appropriations Act (CAA) of 2021, the ERC section of the Coronavirus Aid, Relief, and Economic Security (CARES) Act was expanded and extended.

The Employee Retention Credit (ERC) has now become eligible for many private-sector employers and tax-exempt organizations. Essentially this translates to a fully refundable tax credit against Federal taxes for qualified wages paid by employers to full-time employees throughout the coronavirus pandemic.

How much is the IRS offering businesses?

The most current version of the The Employee Retention Credit (ERC) provides a refundable tax credit of up to $5,000 for each full-time employee retained between October 1, 2020 and December 31, 2020 and up to $28,000 for each employee retained between January 1, 2021 and December 31, 2021. A company that employs ten people full-time could be eligible for up to $330,000, while a 100-person business of full-time employees could accumulate $3,300,000.

What taxes will the Employee Retention Credit (ERC) offset?

The tax credit offsets all withheld federal employment taxes including federal income tax withholding, Employer FICA and Medicare. Any excess credit will be refunded or advanced by the IRS. By refunded, this means the IRS will issue checks and/or direct deposit funds into business bank accounts. Many businesses are missing out on this opportunity, but Galileo Hunt is here to help streamline the process and get you the most tax credit possible.

The tax credit is a sum of capital that taxpayers can directly reduce from taxes owed to the government. In contrast to tax deductions, which function as a way to lower the weight of taxable income, tax credits subtract from the total amount of tax owed. For example, if a taxpayer owes $3,000 in Federal taxes but is eligible for a $3,000 tax credit, the net liability is $0.

How does the IRS define "full-time employment" for the Employee Retention Credit (ERC)?

Full-time employment is defined as having an average of 30 hours per week or 130 hours per month. Qualified wages are determined by how many full-time employees an Eligible Employer has. For the calendar year of 2020, if an employer averaged more than 100 full-time employees in 2019, qualified wages are defined as wages and health care costs paid to employees that aren’t working due to complete or partial shutdown or due to a decline in gross receipts. If an employer averages less than 100 full-time employees during 2019, it is the same principle as a larger company; however, an employer can claim wages for all employees regardless of whether or not they were working. For the calendar year of 2021, the amount of full-time employees was raised to 500, meaning that if 500 or more people are employed only those who are not providing services can be claimed; whereas if there are less than 500 full-time employees, an employer can claim wages for all employees regardless of whether or not they were working.

Some restrictions to claiming wages include if the employer is related to an employee (as defined by section 51(i)(1) of the Internal Revenue Code). In addition, the wages of an employee used for Work Opportunity Tax Credit cannot be included for The Employee Retention Credit (ERC).

How does the IRS define an "eligible employer" for the Employee Retention Credit (ERC)?

An Eligible Employer is an individual that has continued their trade or business during the relevant calendar year, including tax-exempt organizations, that have either completely or partially halted operations during any calendar quarter (due to direct mandate from an applicable government official which resulted in minimized trading, travel, or assembly for commercial, social, religious, or other purposes) due to the COVID-19 crisis; or have experienced a notable diminishment in “gross receipts” during the relevant calendar quarter. The IRS defines gross receipts as the total sum a given organization “has received from all sources during its annual accounting period, without subtracting any costs or expenses.” To be an Eligible Employer, you must meet at least one of the two conditions.

  • Between January 1, 2021 and June 30, 2021, this is determined by a decline of at least 20 percent in gross receipts when compared with the same calendar quarter in 2019.
  • However, from March 13, 2020 to December 31, 2020, it is determined as a decline of at least 50 percent in gross receipts when compared with the same calendar quarter in 2019.

How does the IRS define an "a qualifying condition of my business" for the Employee Retention Credit (ERC)?

There are various circumstances that could be considered in line with the qualifying conditions of the The Employee Retention Credit (ERC). A partial shutdown could be due to a change in business hours caused by mandatory curfew instated by either Federal, state, or local government. For example, in California, Governor Gavin Newsom imposed a stay-at-home order that prevented nonessential work and social gatherings between the hours of 10:00pm and 5:00am. So, a restaurant that normally operated from noon to 2:00am, but had to adjust to this mandate, is eligible for The Employee Retention Credit (ERC). It is vital to note that voluntary changes in business hours are not considered a partial shutdown.

Another instance of partial closure could be considered the limiting or altogether halt of suppliers to an essential business. The rule of thumb is that essential businesses do not qualify for The Employee Retention Credit (ERC); however, with regards to suppliers being blocked from processing deliveries to essential businesses, there is some ambiguity. For example, if a supplier in California is denied the ability to produce and deliver critical materials to an essential business in Colorado due to state directives, and as a result the company in Colorado is unable to fully operate without the necessary materials, the Colorado company could be interpreted as eligible.

How will the IRS issue the Employee Retention Credit (ERC)?

Again, the tax credit offsets all withheld federal employment taxes including federal income tax withholding, Employer FICA and Medicare. Any excess credit will be refunded or advanced by the IRS. To claim your credit immediately, it is imperative that you reduce payroll taxes sent to the IRS. You can claim your credit by deducting it from any withholding amount (including Federal income taxes, employee FICA taxes, employer FICA taxes).

Who can help me file the proper forms for the Employee Retention Credit (ERC)?

Since the inception of the coronavirus pandemic, businesses have been struggling to stay afloat and stay open. Galileo Hunt strives to aid business owners (both small and large), executives, and independent professionals in regaining financial stability and ultimately thriving within their chosen industry. Through the assistance of Galileo Hunt’s team of expert financial consultants, budgetary wellness can be achieved.

Finding an accounting firm focused on maximizing your Employee Retention Credit (ERC) can be a daunting task, but Galileo Hunt strives to ease your mind and offer the best services in the industry. We will help you create a financial strategy that best suits your needs.

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Disclaimer: The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Galileo Hunt to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Galileo Hunt or other tax professional prior to taking any action based upon this information. Galileo Hunt assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

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