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Answering Key Question About Employee Retention Credit (ERC)

woman applying for the Employee Retention Credit.

NEWITY recently hosted a webinar on the Employee Retention Credit Program with Luke LaHaie, Co-Founder and Co-CEO and Dane Colvin, Senior Associate FP&A. They answered several key questions about Employee Retention Credit (ERC), some myths you may have heard, and applying in 10 minutes or less with NEWITY.

Below, we will answer key questions you may still have about what the ERC program was, identify common myths as well as questions you may have, and what–if anything–applies to your small business. Be sure to click here if you are interested in learning about SBA funding options available to you right now

Key Questions about ERC

ERC is a fully refundable tax credit available to businesses that were impacted by COVID-19. Created from the same CARES Act that established the Paycheck Protection Program (PPP), the main goal of the Employee Retention Credit is to provide economic relief for businesses that retained employees during the pandemic.

The thing that makes ERC unique and especially exciting for small businesses, is the refundable tax credit aspect. This means that even if you only paid $100 in taxes, if your refund is $1,000, you would get that full amount back as a check from the government. With a non-refundable credit, you would only get the amount you paid (i.e., $100).

The ERC program allows you to claim up to $5,000 per employee retained in 2020 and up to $21,000 per employee retained in 2021. In total, employers can receive a tax credit up to $26,000 per retained employee.

Many people have questions about the Employee Retention Credit and its requirements. The first step in determining qualification for ERC is looking at the company’s employees. ERC can go toward wages paid in 2020 and 2021 to W2 non-owner employees. Unfortunately, this means there isn’t a credit applicable for 1) wages paid to owners of 50% or more of the business or their relatives, or 2) 1099 contractors.

If you meet this initial qualification, you must also meet one of the two following scenarios:

  1. You had a decline in gross receipts for the same quarter year-over-year – To pass this test, quarter in 2020 had to decline more than 50% compared to the same quarter in 2019, or quarter in 2021 had to decline more than 20% compared to the same quarter in 2020.
  2. Your business was partially or fully suspended as a result of government orders related to COVID-19 – This test requires looking at where your business is located (e.g., state or local jurisdiction it falls under) to show which shutdowns affected you.

How NEWITY can helpNEWITY has streamlined the application and review process for ERC. Alongside the simple application process, NEWITY employs CPAs, tax professionals, and a legal team to confirm that your business qualifies for the credit and calculates the maximum eligible refund amount for your company.

Recovery startup businesses: If you started your business after February 15th, 2020 (i.e., didn’t have revenue or employees in 2019), you can still qualify for ERC. These companies are referred to in the legislation as recovery startup businesses, who can qualify for up to $100,000 of tax credit based on W2 wages paid. We encourage anyone who started their business after 2/15/2020 all the way through 2021 to apply for ERC, and we are happy to help you assess if you qualify.

Since ERC filings are done by quarter, there are two different deadlines:

  • For 2020 quarters, the deadline is April 15, 2024
  • For 2021 quarters, the deadline is April 15, 2025

Despite these deadlines, NEWITY recommends businesses apply for ERC as soon as possible, as this program is subject to legislative changes that could alter the program’s availability.

Employee Retention Credit Myths

Along with answering key questions about the ERC program, there are also plenty of misconceptions about ERC–especially since there were multiple shifts to the original legislation–that may confuse business owners about whether they qualify.

PPP loan(s) do not impact eligibility for the ERC. There has been a lot of confusion on this due to changing rules over time. Initial legislation (the CARES Act) that said PPP was a disqualifier was followed up with new legislation (the Recovery Act) in January 2021 that overturned this and applied retroactively. So, you are allowed to receive both a PPP loan and ERC.

The only caveat is that you can’t count wages twice, meaning, that if you use wages to apply for PPP loan forgiveness, you can’t use those same wages to qualify for ERC. You should be very careful not to take credit for both, or your business could run into issues. NEWITY can help calculate and confirm that you do not take credit for both.

One of the most common questions about the Employee Retention Credit is regarding what your revenue needs to look like in order to qualify. As mentioned in the qualification question above, revenue decline is only one path of eligibility for ERC. Disruptions due to government COVID-19 orders can also qualify your business for the tax credit. Our shutdown team can work with you to determine which quarters you may qualify for.

If you apply for ERC on your own, this can be true – ERC tax code is complicated and nuanced and there are 275 pages of legislation. Applying doesn’t have to be difficult. NEWITY has simplified the application and filing process for thousands of small businesses just like yours.

What to Expect Next with the Employee Retention Credit

Once your tax form has been submitted by NEWITY to the IRS, it can take six to nine months to receive your refund. Unfortunately, there is no way to expedite payment, although NEWITY has heard that the IRS’ refund issuance time may shorten. As previously mentioned, NEWITY recommends business owners apply as soon as possible to enter the IRS’ queue.

You’ll be able to check the status of where your application is in the process directly in your NEWITY dashboard. These are some of the most common questions about the Employee Retention Credit (ERC).

We are no longer accepting ERC applications. However, we’re happy to help you access affordable funding through an SBA 7(a) loan

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To qualify for an SBA 7(a) small business loan, your business must be:

  1. U.S.-based and operated
  2. Owner supported / owner funded
  3. Eligible per the SBA’s requirements

Your loan amount will determined by the business’ average annual revenue, FICO score, and years in business