The Employee Retention Credit (ERC) is a tax credit available to small business owners, LLCs, S-Corps, and 1099 employees. This credit was applied to their share of the employee's Social Security taxes and was fully refundable. Unfortunately, the ERC for self-employed workers is not available, but the government created a very similar tax credit (COVID tax credits) for those who are self-employed. It is always best for taxpayers to consult a CPA for basic frequently asked questions about the employee retention tax credit to ensure that their company receives the maximum credit.
Small businesses, defined as those with fewer than 500 employees, can receive prepayment of credits, with some limitations, using the IRS Form 7200. However, if you have 100 workers or fewer, you can claim the salaries of all employees, regardless of whether they are working or not. Business owners who were not recovering startups were not eligible for the employee retention credit for wages paid after September 31. Nonprofit companies may be eligible for the ERC, although they are generally exempt from income tax. They still pay labor taxes on the salaries they pay to their employees.
The owners of an LLC are not considered employees and do not receive salaries because, as sole proprietors, they simply extract funds from the company's expected profits. For employers who have received a PPP loan, if they included more payroll costs than needed in the application, the payroll costs that were excluded, along with other eligible expenses, can be used as qualification costs when determining their ERC. Companies that had to suspend some or all of their operations due to government restrictions related to COVID-19 or companies that lost 50% of their gross revenues in the same quarter of the previous year qualified for the ERC. It provided some relief to struggling companies, which kept their employees on their payrolls even when government restrictions due to the pandemic forced them to suspend operations or affected their gross revenues. The employee retention credit was a refundable tax credit that small businesses could apply for during the COVID-19 pandemic.
However, an eligible employer can file Form 941-X (mailed to the IRS) of the employer's adjusted federal tax return or a request for reimbursement. The employee retention credit applies to workers employed full or part time if their employers met the requirements. The ERC was a tax credit in which business owners received a refundable tax credit for keeping employees on the payroll during the COVID-19 pandemic. This was an excellent opportunity for small businesses to receive financial assistance while continuing to pay their employees during this difficult time.