The ERC is a refundable tax credit initially introduced in March 2020 as part of the CARES Act. It was initially designed to help businesses keep employees on their payroll during the pandemic by providing them with a tax credit that can be used to offset payroll taxes. However, the ERC was subsequently amended several times and now has unique provisions for startup businesses. This guide will explain these provisions.
What Is A Recovery Startup Business?
The American Rescue Plan Act (ARPA) has a specific provision for “recovery startup businesses” to more easily obtain the Employee Retention Credit (ERC). To qualify for this credit, there are specific criteria that your business needs to meet.
- First, your business must have started on or after February 15, 2020.
- Second, your annual gross receipts should not exceed $1 million for the 2020 and 2021 tax years. (For partial years, you take an annual average.)
- Third, you need one or more W2 employees — but not over 100.
For example, if you started a food delivery business on April 1, 2020, with three employees and earned $500,000 for the 2020 and 2021 tax years, you would be considered a recovery startup business and a perfect candidate for the ERC.
What Can Recovery Startup Businesses (RSBs) Claim?
The most important aspect of the RSB provisions is that all wages in Q3 and Q4 of 2021 are eligible (except those paid to owners or their family members), even if you did not experience a decline in revenues or a partial suspension of services due to a government order. There is a cap on $50,000 per quarter if these provisions are utilized. However, this is much easier than ERC qualification for ordinary businesses.
How To Claim ERC For Startup Business
To claim the Employee Retention Credit (ERC) for your startup business, you need to follow these steps:
Determine If Your Business Is Eligible For The ERC
As a above, you must meet certain eligibility criteria to claim the ERC. These include starting your business on or after February 15, 2020, having annual gross receipts of less than $1 million for the 2020 and 2021 tax years, and having one or more W2 employees. If you meet these criteria, you can be considered a “recovery startup business” and claim the ERC in this way.
Identify Eligible Quarters
Once you confirm your eligibility, you must identify which quarters in 2020 and 2021 you can claim the ERC for. For 2020 and Q1 and Q2 of 2021, this will depend on your specific situation and whether your business experienced a significant decline in gross receipts or was subject to government-mandated closures or restrictions. The rules for these provisions are complex and there is a risk of over-qualifying or under-qualifying if they are not carefully followed.
Calculate The Credit Amount
For 2021, the ERC is calculated as 70% of eligible wages paid to employees during each eligible quarter, up to a maximum of $7,000 per employee per quarter. However, you will need to account for any PPP received, exclude ineligible employees, and ensure that there are no other regulatory obstacles to qualification. As a startup business, you can claim up to $50,000 per quarter for the final two quarters of 2021.
Document Your Eligibility And Calculations
It’s crucial to keep detailed records of your eligibility and calculations to support your claim for the ERC. This includes records of your gross receipts, employee wages, and any government-mandated closures or restrictions that impacted your business.
Work With ERC Tax Experts
As you can see, even for RSB’s, the rules around the ERC can be complex, and the eligibility criteria and calculations can vary depending on your specific circumstances. You should work with ERC tax experts to ensure you’re accurately claiming the credit and maximizing your benefits. That, of course, is why Spider ERC exists.