Unlock Savings: Employee Retention Credit Guide for Startups

A tax incentive program that rewards companies that kept their staff during the COVID-19 pandemic is now active again. Your business might qualify for the Employee Retention Credit (ERC).

Right now, there is no clear end date for this program. This means there is still time for your startup to benefit from this tax opportunity. Qualifying businesses receive a credit from the IRS in the form of a cash check. Read on for answers to common questions about the ERC and to learn if your business qualifies.

What is the Employee Retention Credit?

The IRS created this one-time tax credit to thank companies that avoided layoffs during the pandemic. The credit assigns a dollar amount to each employee kept on board over a certain period. A business that meets the specific criteria for the program then receives a cash check. This is not a credit that reduces your business tax liability in future years – it is a live check.

Does my business qualify for the ERC?

Any business can apply for the Employee Retention Credit. The IRS does not impose restrictions on company size or industry. As long as you had W2 employees on your payroll for the applicable periods, your business may be eligible.

For businesses founded before 2020, the credit applies to all four quarters of 2020 and the first three quarters of 2021. Maybe you launched your startup during the pandemic. If you are eligible for the ERC, you receive an extra quarter. The credit would also apply to Q4 of 2021 for new companies.

Businesses must meet the following criteria to qualify for the credit:

1. Did you have eligible W2 employees during the applicable periods?
2. Proof of a decline in business, supported by gross receipts.
3. Proof that despite the decline in business, you kept employees on board, supported by payroll taxes.
4. Government shutdown impact.

The criteria outlined here are not necessarily straightforward. Working with a financial professional may be beneficial to determine if you qualify for these tax savings for startups.

How much do I get for the ERC?

Your credit amount depends on the number of eligible W2 employees you had on payroll during the qualifying periods. Employees cannot be relatives, friends, owners of the business, or 1099 contractors.

Eligible employees must make market wages. If they made minimum wage or worked part-time, there is a cap on the amount the IRS will pay per employee.

The amount of credit you receive will vary based on IRS criteria and how your business meets those criteria. Let’s look at an example:

• The owner of XYZ company had 10 full-time, market-wage W2 employees in Q4 of 2019. During the pandemic, XYZ company experienced a decline in business and downsized to eight employees. Those eight employees were on the payroll all four quarters of 2020 and the first three quarters of 2021. The IRS will take those employees and multiply by a dollar amount. For this example, we will use $5,000. Eight employees at $5,000 each is $40,000 per quarter. XYZ business retained these eight employees over seven qualifying quarters, making the credit amount $280,000 in this scenario.

If I hired new employees during the pandemic, do they count toward the Employee Retention Credit?

Yes. Businesses receive credit not only for the employees retained but also for those they hired. This means your startup could be maximizing tax credits by reporting your full employment history for the qualifying periods. You will want to provide your business’s complete employment history to calculate your maximum credit amount.

How much time do I have to file for the ERC?

Right now, there is no deadline to file for the Employee Retention Credit, so the sooner, the better! The IRS briefly paused the program to investigate fraudulent claims and recently relaunched it. We don’t know how long it’s going to be available, so take advantage of this opportunity before time runs out. The tax savings for startups could be significant, and delaying may mean missing out on crucial funds.

When will I receive my ERC check?

Unlike the “Where’s my refund?” tool, there is not a way to track the status of your ERC application or when you will receive your check. We recommend mailing your application certified mail to confirm it reaches the IRS. This also provides you with proof of receipt.

Be patient and expect this process to take some time. Keep copies of your application and all supporting documents. Wait 90 days, then contact the IRS for an update.

Confirm with the agent that they’ve received your paperwork and have everything they need. Have your documentation in hand in case information is missing or needs further verification. Jot down the agent’s name and the date and time you spoke in case you need to follow up.

Are there requirements for how I spend ERC money?

There are no restrictions or limitations on how a business spends money received from the ERC. You can use the money however you want to benefit your startup or small business.

Do I have to pay taxes on my ERC check?

The money received from the IRS for the Employee Retention Credit is tax-free.

Beware of Employee Retention Credit scams

Unfortunately, there are scammers out there who try to take advantage of startups that are just trying to save money. When the ERC first launched, many businesses fell victim to fake companies that promised to help with ERC filings. Once these scammers collected a fee up front, they disappeared.

Use caution if a company approaches you offering to help you file for this credit. Do your research to make sure they’re legitimate.

How long does it take to file for the ERC?

Working with a professional firm, like Escalon, can make the filing process quick and easy. Our experts can determine if your business qualifies, to ensure you’re maximizing tax credits for startups.

Get in Touch

Ready to learn if you qualify for the Employee Retention Credit? Reach out to Escalon and let one of our expert CFOs help your startup save today.