New startup businesses that began operations in 2020 or 2021 may be eligible for the Employee Retention Credit (ERC), a significant tax credit worth up to 70% of the total employee wages paid between June and December 2021.
The American Rescue Plan Act (ARPA) of March 2021 expanded the ERC program, including a new provision for Recovery Startup Businesses, or RSBs. A new eligibility component was added, allowing RSBs to qualify for ERC for the third and fourth quarters of 2021.
If you opened a new business during the COVID-19 pandemic, the provision for Recovery Startup Businesses could be an opportunity for you to receive a significant tax credit through the ERC.
Let’s dive into how it works.
Who qualifies as an ERC Recovery Startup Business?
According to IRS Notice 2021-49, an employer must meet the following criteria to qualify as a Recovery Startup Business:
- Started operations of their trade or business after February 15, 2020
- Have average annual gross receipts under $1 million for the three tax years
- Paid taxable wages to employees during the applicable quarters
- Not eligible for the ERC under other qualification options (i.e. suspended
operations or decline in gross receipts)
- Small employers – defined as having no more than 500 full-time employees – including tax-exempt organizations under IRC Section 501 (a) and (c).
Note that gross receipts for all related entities with common ownership must be included in the overall calculation.
Startup businesses were mostly shut out of other funding options during COVID-19 – like the Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) – so ERC can be a great opportunity for newer businesses to capture some of the benefit from pandemic-era legislation.
How much can Recovery Startup Businesses receive from the ERC?
Businesses that qualify as a RSB are eligible to receive up to the maximum ERC of $50,000 per quarter for the third and fourth quarters of 2021 for a total yearly benefit of up to $100,000. Note, if the business qualifies under the original ERC rules – the suspension test or revenue reduction criteria – then the $50,000 quarterly limit no longer applies.
The tax credit for each quarter is equal to 70% of eligible employees’ wages up to a maximum of $10,000 per employee per quarter (a credit of $7,000). Here are a few important things to note:
- Qualified healthcare expenses can also count as eligible wages
- Owners, spouses, and other family members generally do not meet the definition of an eligible employee
Example RSB Calculation for ERC
The calculations of how much an RSB can receive from ERC depends on a number of factors, but here’s a simplified version:
A business has 5 employees who each make $10,000 per quarter. 70% of those wages qualify for ERC.
Q3: 5 employees x $7,000 per employee = $35,000
Q4: 5 employees x $7,000 per employee = $35,000
As a new startup business with 5 employees at this wage level, the ERC check from the IRS would be $70,000 – a significant cash inflow for a new business.
Ready to claim the ERC as an RSB?
If you are interested in claiming the ERC and think you qualify as an RSB (or under normal business criteria), you can easily apply for the tax credit with NEWITY’s assistance. NEWITY’s ERC team can help you determine if you qualify and file amended tax forms to receive your credits without any of the stress or hassle.
Connect with NEWITY to ensure you receive every penny you deserve!