Was your business affected by COVID? Did you continue paying wages and healthcare costs despite a drop in revenue or shutdown orders? If so, you might be entitled to receive a tax credit for wages and healthcare costs that you already paid.
Working with an ecommerce CPA, an accountant for Amazon sellers, or a Shopify accountant is the simplest way to tell if you are eligible for the ERC. However, here are the basics you need to know to give you background information on eligibility, credit amounts, and the claiming process.
What is the ERC?
The Employee Retention Credit, known as the ERC, is a refundable payroll tax credit for qualifying wages paid between March 13, 2020 and September 30, 2021. The credit is calculated based on employee wages and healthcare costs and offsets the employer’s portion of social security tax.
What are the Credit Limits?
The ERC has different credit limits for 2020 and 2021. In 2020, the maximum credit is $5,000 per employee for the year, which is calculated as 50% of qualifying wages up to $10,000. However, for 2021, the employers can claim up to $7,000 per employee per quarter, which is comprised of 70% of wages up to $10,000.
There are additional credit limitations and claiming abilities for startups. If you are a startup and believe you qualify for the ERC, reach out to an Amazon seller accountant or a Shopify CPA to learn more.
Who Qualifies for the ERC?
Not all businesses can claim the ERC. There are two main ways to become eligible. First, your business had to either experience a full or partial suspension of operations due to government orders in any quarter. If your business didn’t fully shut down, you may still be eligible to claim the ERC. Contact an Amazon FBA CPA to go over qualifications.
The next way to qualify is to have a significant decline in gross receipts. For 2020, a significant decline means less than 50% of gross receipts compared to the same calendar quarter in 2019. For 2021, businesses only need a 20% decline in gross receipts compared to the same quarter in 2019. The differences in rules make it essential to work with a Shopify Accountant or an Amazon accountant.
How to Claim the ERC
Since the ERC gets claimed on the 941s, your Shopify CPA or Amazon FBA CPA might have already submitted these forms. This means your ecommerce CPA needs to prepare a 941-X, which amends your original filing to claim the credit.
It’s important to note that you can’t double dip on wages used for the ERC, Payroll Protection Loans, and other COVID relief items. Your Shopify accountant should be able to tell you which wages were allocated to other relief items.
For example, let’s say you paid employees $50,000 in wages during Q2 2021. Your Amazon accountant used $40,000 of these funds to claim PPP forgiveness. This leaves you with only $10,000 of qualifying wages for the ERC.
Refunds take anywhere between three and nine months to receive and will come in the form of a check. To expedite the process, you want to be sure everything on your 941-X is accurate. Working with an ecommerce CPA helps ensure accurate and timely filings.
What are the Tax Implications of the ERC?
The ERC is not a tax-free credit. Instead, the wages used for ERC will need to be added back to your federal taxable income for the corresponding year. For example, if you are claiming the ERC for 2021, your Amazon tax accountant may need to amend your 2021 return to report the increased wage amount.
Then, in the year you receive the ERC funds, your Shopify accountant will report the funds as tax-exempt. It’s important to note that many states don’t follow the same regulations as the federal government. In some states, the ERC is non-taxable. This is why it’s important to work with a CPA for Amazon sellers or a Shopify CPA to ensure you are properly claiming the credit when filing tax returns.
Summary
Are you interested in claiming the Employee Retention Tax Credit? If so, you want to position your business for success by working with the right ecommerce CPA. Our team at BUSINESS has helped dozens of Amazon and Shopify sellers claim the ERC.
We can help you maximize your claim and ensure a smooth process from start to finish. Reach out today to learn more about getting started.
