A Comprehensive Guide on Applying for the Employee Retention Credit

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As a small business owner, did you know you can receive a refundable tax credit for keeping your employees on payroll during these tough times? This refundable credit, also known as Employee Retention Credit (ERC), was implemented by the CARES Act in March 2020 and extended by the Consolidated Appropriations Act in December 2020. If you haven't applied for this credit yet, don't worry. This guide provides a comprehensive review of how to apply for the Employee Retention Credit.

What is the Employee Retention Credit

The Employee Retention Credit (ERC) is a refundable tax credit that is designed to encourage businesses to keep employees on their payroll during periods of significant disruption or hardship, such as the COVID-19 pandemic. This credit applies to qualified wages paid after March 12, 2020, and before January 1, 2022. For 2020, the credit can be up to 50% of qualified wages paid, with a limit of $10,000 per employee for the year. For 2021, this has been increased to 70% of qualified wages paid, with a limit of $10,000 per employee for each quarter.

How the ERC can help your small business

Your business can benefit from the Employee Retention Credit program by getting a tax credit if your business meets the eligibility requirements. The ERC amount depends on the period over which a business qualifies and the number of employees.

For 2020: Up to $5,000 per employee per year in 2020.
Specifically, 50% of the first $10,000 in wages was paid to qualified employees during impacted periods (Q2-Q4/2020).

For 2021: Up to $7,000 per employee per quarter (Q1-Q3).
Specifically, 70% of the first $10,000 in wages per quarter during impacted periods (Q1-Q3/2021). Up to $26,000 per employee is available for businesses and organizations qualifying throughout Q2/2020 thru Q3/2021.

However, wages previously paid for by a forgiven PPP loan or other federal COVID relief programs (e.g., Work Opportunity Tax Credits, EFMLA, and EPSLA) must be backed out from ERC calculations.

Steps to Applying for the Employee Retention Credit

  1. Determine Your Eligibility:
    The first step in applying for ERC is to determine your eligibility. Your business must meet one of two criteria to qualify for this credit. First, your business must have fully or partially closed down due to the government's COVID-19 lockdown orders in 2020 and 2021. Second, your business must have experienced a significant decline in gross receipts in one or more quarters of 2020 and 2021 compared to the same quarter in 2019. Additionally, you must have paid qualified wages to employees to claim the credit.
  2. Calculate Your Eligible Credit Amount:
    Once you determine your eligibility, the next step is to calculate your eligible credit amount. If your business experienced a significant decline in gross receipts, the credit amount is based on each employee's qualified wages paid during the applicable quarter, up to $10,000 per employee per quarter. If your business was fully or partially shut down, the credit amount is based on each employee's qualified wages paid during the shutdown period, up to $10,000 per employee.
  3. Claiming the Employee Retention Credit:
    To claim the ERC, you must fill out IRS Form 941, Employer's Quarterly Federal Tax Return, for the applicable quarter(s) and include the credit amount on line 11c. If your credit amount exceeds your total federal employment tax deposits, you can request an advance payment by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. You can claim the credit for all eligible employees, including those who were furloughed or laid off but were rehired before January 1, 2021.
  4. Keep Records and Documentation:
    It's crucial to keep accurate records and documentation of all eligible employee wages and other expenses that support your ERC claim. You must retain all records for at least four years after the filing date of the tax return on which you claimed the credit. If you receive an advance payment, you must reconcile the advance payments on Form 941.
  5. Seek Professional Guidance:
    The ERC is a complex tax credit, and seeking professional guidance is always recommended. A qualified tax advisor can help you determine your eligibility, calculate your eligible credit amount, and ensure you have followed the necessary steps to claim the credit. Additionally, a tax advisor can review your documentation and records to verify that they support your ERC claim.

How Adesso Helps Small Businesses Claim the ERC

We understand that this process may require valuable time that you don't have, which is why we partnered with Adesso. Adesso simplifies the process of claiming Employee Retention Credit for small businesses. By leveraging advanced technology and a user-friendly interface, Adesso provides an automated and streamlined approach to applying for ERC.

Adesso aids in determining your eligibility by analyzing your business's financial data. The platform uses a short, 3-minute quiz to assess whether your business meets the criteria for the ERC. If you qualify, Adesso can help you receive cash from taxes you already paid, up to $26,000 per W-2 employee. Next, Adesso calculates your potential credit amount based on the wage data you provide. It ensures accuracy and maximizes potential credit return by including all eligible wages.

When it comes to claiming the ERC, Adesso helps you fill out the necessary IRS forms, reducing the risk of errors that could delay your credit. If your credit exceeds your total federal employment tax deposits, Adesso supports you in filing Form 7200 for advance payment. They also offer a robust record-keeping system. The platform securely stores all your wage records and other necessary documents for your ERC claim, saving you the trouble of manual record-keeping.

Lastly, Adesso offers access to professional advice. If you need guidance or have questions during the process, Adesso connects you with qualified tax advisors who can offer expert assistance. With Adesso, claiming the ERC is no longer a daunting task. Simplify your process, ensure accuracy, and optimize your credit return, all within a single platform.

Deadline for Applying for the Employee Retention Credit

The Employee Retention Credit was initially available for wages paid from March 13, 2020, through December 31, 2020. However, subsequent legislative changes have extended this credit through December 31, 2021. This means that eligible employers can claim the credit for qualified wages paid throughout the entire 2021 year. It's important to note that while the program was extended, there is a deadline for claiming this credit, which should be claimed on the employer's federal employment tax return (Form 941). The Employee Retention Credit deadline for the 2020 tax year is April 15, 2024, and the deadline for Q1, Q2, and Q3 for the 2021 tax year is April 15, 2025.

Get started with Adesso Today

The Employee Retention Credit can significantly relieve small businesses struggling during these uncertain times. By following these steps and seeking professional guidance through Adesso, you can maximize your eligible credit amount and ensure that you receive the benefits of this valuable government program. Contact Adesso's CPA team of tax experts for more information on the Employee Retention Credit and get started to see if your business qualifies for free.ERC