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Home Business Finance How To Qualify As A Recovery Startup Business For The Employee Retention Credit
The COVID-19 pandemic created a variety of challenges for small businesses. Despite this, however, countless startups have successfully made their debut across the country during this time. If you launched a venture after February 15, 2020, you might qualify as a recovery startup business and be eligible for the Employee Retention Credit (ERC). Let’s take a closer look at what the ERC is and how you may benefit from it.
The ERC is a refundable tax credit claimed on quarterly payroll tax filings. It was originally part of the CARES Act of 2020 and designed to help business owners who have struggled financially as a result of the pandemic.
The American Rescue Plan of 2021 made changes to the ERC by extending it to “recovery startup businesses”. Depending on your situation, you may be able to claim the credit retroactively for both 2020 and 2021.
Per the American Rescue Plan Act, a business that opened its doors during the pandemic can receive the credit. Your startup may be eligible if you meet the following criteria.
For example, if you launched a food delivery business on April 1, 2020 with three employees and earned $500,000 for the 2020 and 2021 tax years, then you’re considered a recovery startup business and a perfect candidate for the ERC.
Unfortunately, if you started your venture in the second quarter of 2021, you won’t be able to claim any credit for 2020 or for the first two quarters of 2021. But, if you meet certain revenue reduction or government restriction criteria, you might be able to claim the credit for earlier quarters.
In addition, if you purchased an existing business that was in operation on or before February 15, 2020, you may or may not be considered a recovery startup business. It all depends on your unique circumstances. Since the rules around this particular eligibility requirement are complex, working with ERC tax experts can help you determine if you qualify.
If you’re considered a recovery startup business, you can receive a credit in the amount of $7,000 per worker, per quarter. The max is $50,000 for the final two quarters of the year. To maximize your credit, pay close attention to your gross receipts and make sure you didn’t go over the $1 million annual revenue run rate limit for the 2020 and 2021 tax years.
Let’s say you have four employees. If you multiply four employees by $7,000 per employee in quarter 3, you get $28,000. When you perform the same calculation for quarter 4, you also come to $28,000. As a startup with four employees, you’d receive a $56,000 check from the IRS. That’s a significant amount of money!
You can put these funds toward inventory, equipment, a new office space, marketing, or any other expenses that can help grow your business. Another option is to simply distribute the cash to the owners. There is a lot of flexibility with how you may use the ERC.
Under the CARES Act, the definition of qualified wages depends on the size of your business.
If you’re a smaller venture with an average of 100 or fewer full-time or full-time equivalent employees in 2020 or fewer than 500 full-time employees in 2021, qualified wages include all wages you paid to your employees, whether they were working or not. This includes qualified health plan expenses during an eligible quarter. A full time employee (FTE) is defined as anyone that worked more than 30 hours on average per week.
In the event you had more than the 100 (FTE’s) in 2020 or 500 (FTE’s) across all affiliated businesses in 2021, qualifying wages have a slightly different meaning. These are wages that were paid to an employee for time that they weren’t working due to either suspended operations or a substantial decline in gross receipts.
While you’ve likely already filed your taxes for 2020 and 2021, you can still claim the credit retroactively. To do so, fill out Form 941-X. Be prepared to calculate your total qualified wages and health insurance costs for each quarter. You’ll subtract that amount from your deposit on Form 941. ERC Calculations and rules can be complex so often it makes sense to consult ERC tax experts for help.
If you meet the criteria for a recovery startup business, you owe it to yourself to take advantage of the ERC. While it’s widely available to many startups who launched during the pandemic, it’s often untapped. The ERC can give you the extra cash you need to meet a variety of business goals.
Yes. Recovery startups or new businesses who began operation after February 15, 2020 can claim the ERC for wages paid prior to January 1, 2022 as long as they have less than $1 million in revenue, as well as one or more employees, other than owner-operators and family members.
Yes. However, any wages you paid with PPP funds won’t be considered qualified wages. This is known as “double dipping” and not permitted.
Anna Baluch is a freelance personal finance writer from Cleveland, Ohio. You can find her work on sites like The Balance, Freedom Debt Relief, LendingTree and RateGenius. Anna has an MBA in marketing from Roosevelt University.
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