ERC Assessments

Can Startups Benefit From The Employee Retention Credit?

Jul 08, 2023

As a startup, attracting and retaining talented employees is crucial for the success and growth of your business. However, the cost of hiring and keeping top talent can be a significant challenge, especially for small businesses with limited resources. That's where the Employee Retention Credit (ERC) comes in.

What is the Employee Retention Credit?

The Employee Retention Credit is a tax credit provided by the IRS to eligible employers who have been financially impacted by the COVID-19 pandemic. It was introduced as part of the CARES Act in 2020 and has been extended through 2021 to provide further relief to businesses.

How can Startups Benefit from the ERC?

Startups can benefit from the Employee Retention Credit in several ways:

  1. Financial Relief: The ERC provides a refundable tax credit of up to $5,000 per employee for eligible businesses. This can help alleviate some of the financial burden associated with retaining employees during challenging times.
  2. Retaining Top Talent: By offering the ERC, startups can provide additional incentives for employees to stay with the company. This is especially important in a competitive job market where talented individuals have more options.
  3. Investing in Growth: With the financial relief provided by the ERC, startups can allocate resources towards other areas of the business, such as product development, marketing, or expanding their team.

Eligibility Criteria

While the Employee Retention Credit can be a valuable resource for startups, it's important to understand the eligibility criteria:

  • The business must have experienced a significant decline in gross receipts due to the pandemic, with a decline of at least 50% compared to the same quarter in the previous year.
  • Startups with fewer than 100 full-time employees can claim the credit for all employees, while those with more than 100 employees can only claim it for employees who are not providing services due to the pandemic.
  • The credit is available for wages paid between March 13, 2020, and December 31, 2021.

There are some eligibilty criteria that may keep startups from receving ERC. But it is still worth looking into. Find out how.

How to Claim the Employee Retention Credit

Claiming the Employee Retention Credit involves several steps:

  1. Calculate the credit amount based on eligible wages and the applicable percentage.
  2. Report the credit on your quarterly employment tax return (Form 941) or annual tax return (Form 943 or Form 944).
  3. Offset the credit against the employer's share of Social Security tax liability.
  4. If the credit exceeds the tax liability, the excess can be refunded or applied to future payroll tax deposits.

It's important to consult with a tax professional or accountant to ensure that you meet all the requirements and properly claim the credit.

Conclusion

The Employee Retention Credit can be a valuable tool for startups looking to attract and retain talented employees while managing their financial resources. By taking advantage of this tax credit, startups can provide much-needed stability and incentives for their workforce, enabling them to focus on growth and success in the long term.