Small business ERTC application process guide

Quick View: Applying for the ERTC

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The Employee Retention Credit (ERTC) is an essential lifeline for businesses reeling from the financial turmoil of the pandemic. Here’s a simplified summary for you:

  • ERTC is a refundable payroll tax credit.

  • Applicable to businesses impacted by COVID-19 restrictions.

  • Businesses can claim up to $14,000 per employee for Mar-December 2020 and $5,000 per employee January 1-September 30, 2021 periods.

  • You need to file Form 941 for your claim.

  • If you received a Paycheck Protection Program (PPP) loan, your ERTC qualification may be influenced, especially note changes in rules from 2020 to 2021.

Overview of the ERTC: A Hope for Small Businesses

In the throes of the pandemic, the U.S government rolled out several lifelines for businesses – the ERTC being one such provision. It was initially part of the CARES Act but was subsequently expanded and extended.

The ERTC is aimed to incentivize job preservation by providing businesses a refundable payroll tax credit. It is of particular help to small businesses struggling to retain employees and stay afloat.

The Foundations of ERTC: Dealing with Pandemic’s Aftermath

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The COVID-19 pandemic left an indelible imprint on the financial landscapes. Economies worldwide encountered crushing setbacks. The ERTC was a beacon of hope in this desolate scenario.

From CARES Act to the ERC

The CARES Act initially introduced the ERTC. Though narrow in scope, it still paved the way for employee retention during the early stages of the pandemic. However, due to the sealing ramifications of COVID-19, the law was expanded and extended, providing opportunities for both small and large businesses to navigate the economic ripple effects of the pandemic.

Intended to motivate businesses to keep employees on the payroll, ERTC is a lifeline to businesses waiting for normalcy to return. It is a refundable payroll tax credit, thus reducing the employment tax liabilities of businesses and, consequently, the impact of the economic crunch.

A Deep Dive into Eligibility Requirements

Eligibility for the ERTC hinges on certain qualitative and quantitative thresholds. Notably, the business must have either been fully or partially suspended due to government restrictions related to COVID-19, or experienced a substantial decline in gross receipts during specific quarters when compared with 2019 levels.

Importantly, the criteria differ between 2020 and 2021 – with an essential difference being the threshold for gross receipts decline – 50% for 2020 and 20% for 2021. Also, businesses showing a decline in gross receipts may claim advance payments unlike those shut by goverment orders.

Businesses applying for 2021 can claim credit both retrospectively – for affected quarters – and prospectively – for upcoming qualified quarters. It’s important for businesses to do their due diligence and closely review these nuances while applying.

Entangling the ERTC: Detailed Application Instructions

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The intricate maze of application procedures may seem daunting. Still, with the right information and a defined structure, you can swiftly and correctly submit your ERTC claim.

Utilizing Form 941 for the ERC claim

You need to complete the Form 941 to apply for the ERTC. This form, known as the Employer’s Quarterly Federal Tax Return, allows businesses to report income, calculate employment taxes, and claim their ERTC.

For retroactive claims, you can adjust the credit on previously filed Form 941 by filing Form 941-X. Make sure to follow the new form instructions closely to claim the credit correctly.

Defining Your Business Size: Large or Small?

Classifying your business, as either large or small, influences your ERTC calculation. The key determinant here is the number of full-time employees on the enterprise’s payroll in 2019.

For tax year 2020, businesses with more than 100 employees could claim the ERTC only for the wages paid to employees for the time they did not provide service due to the suspension of business. In contrast, businesses with 100 or fewer employees could claim the ERTC for all wages paid – irrespective to whether employees could work or not – during the qualified period. As per the updated laws, eligibility calculations for 2021 uses a threshold of 500 employees instead.

Unearth the Key ERC Calculations

The ERTC amount depends on various factors like the wages paid during the qualified periods, health plan expenses, and the number of employees. Know your numbers, and you can maximize your benefit.

  • The maximum amount for 2020 is 50% of qualified wages up to $10,000 annually per employee, translating to a cap of $5,000 per employee.

  • The cap for 2021 is 70% of qualified wages of up to $10,000 per quarter per employee, resulting in a maximum ERTC of $7,000 per quarter per employee.

ERC and PPP: Understanding the Interplay

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The Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) are two independent relief efforts. A business can benefit from both, but not for the same wages. Optimal resource allocation is key, depending on your unique business situation.

Banking on PPP with Simultaneous ERC Claim

Initially, businesses opting for PPP loans were disqualified from the ERTC. This changed with the Consolidated Appropriations Act, 2021, effective from January 1, 2021. Now businesses can draw from both PPP and the ERC. However, any wages utilized for loan forgiveness under PPP can’t be considered for ERTC calculation. Be mindful about managing these finances.

Breaking Away From PPP: Is it Worth it?

A loan or a credit; PPP or ERC; it can be quite the conundrum. Understanding your business finances, payroll strength, and fluctuating cash-flow can help in making an informed decision. Both options provide advantages, but remember, you can’t “double-dip” and claim both for the exact same wages.

Practical Application: A Case Study on Michael’s Pizza

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To understand how all of this works in a practical situation, let’s look at Michael’s Pizza, a small business exploring the benefits of the ERTC.

Decoding Michael’s Pizza’s ERC Eligibility

Michael’s Pizza, a small pizzeria, was substantially impacted by the pandemic, having faced complete weeks of shutdown owing to COVID-19 restrictions. It had less than 100 employees in 2019 and retained all of them during the pandemic, thereby making it eligible for the ERTC.

Calculation of Qualified Wages

Assuming Michael’s Pizza paid all their employees throughout the year during business suspension, for a total of $50,000, they would be eligible for a credit of fifty percent of those wages. That wields a hefty $25,000 in savings, a significant financial relief.

Guarding Your Business: Recognizing and Avoiding ERC Scams

In these digital times, scammers have become highly proficient at defrauding businesses, particularly during crisis times. Awareness and quick action can help safeguard your business.

Stay Informed: Typical Scams to Watch Out For

Beware of phishing scams masquerading as the IRS or related entities, promising quick refunds or credits. Check the legitimacy of any communication you receive.

Trust the quote, “If it seems too good to be true, it probably is.” If someone guarantees an ERTC claim approval or overstates your potential benefit, be skeptical.

Reinforcing Your Business: Legal Advice and Precautions

Consult with professionals, keep records, and follow regulations diligently. This can help in a significant way to avoid pitfalls. Taking guidance and implementing security measures are steps towards protecting your hard-earned money and peace of mind.

Why You Should Act Now: The ERC Timeline and Deadlines

Eligible yet haven’t applied for the ERC? Don’t miss out due to ignorance or procrastination. There are specific timelines to follow, and missing out on the deadlines might lead to lapses in your claim.

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