It’s no secret that the past few years have caused financial distress in many businesses. Despite the growth in ecommerce, your Shopify and Amazon FBA businesses might have experienced a decline in sales, high employee turnover, and employees requesting higher wages.
Luckily, the US Government released different aid packages designed to help business foot the cost of payroll. One of which was the CARES Act which created the Employee Retention Tax Credit.
Your business might qualify for this tax credit, resulting in thousands of dollars in tax savings back in your pocket. Understanding what is the Employee Retention Credit, who qualifies, the claiming process, and the turnaround time is important to pad your checking account back up.
What is the Employee Retention Credit?
The Employee Retention Credit, known as the ERC, was signed into law on March 27, 2020. This is a refundable credit that employers can claim against employment taxes paid between March 13, 2020 and September 31, 2021.
The 2020 credit is calculated based on 50% of qualified wages and healthcare expenses, up to $10,000 per employee, resulting in a credit maximum of $5,000. The credit was increased in 2021 to reach $7,000 per employee per quarter. Like 2020, the credit is calculated based on qualified wages and healthcare expenses up to $10,000.
Recovery startup businesses are limited to a $50,000 credit per quarter. This is a business that opened during the pandemic, such as a new Shopify business. Contact a Shopify accounting firm to determine if this describes your business.
Who Qualifies for the Employee Retention Credit?
Employers must have paid qualifying wages or health insurance expenses to qualify for the ERC. In addition, businesses must meet one of the following criteria to qualify for the ERC:
- Have operations fully or partially suspended due to government orders.
- Experience a 20% decline in gross receipts for the same calendar quarter in 2019.
The American Rescue Plan Act of 2021 expanded employer eligibility to allow a lookback rule. This means if you qualify for one of the quarters in 2021, you automatically qualify for the next quarter regardless of if you experience a government suspension or decline in gross receipts.
How Do You Claim the Employee Retention Credit?
The ERC is claimed by amending the quarterly 941 returns. The general process includes:
- Determine if your business is eligible.
- Calculate qualifying wages and healthcare expenses.
- Remove wages used for Paycheck Protection Program loan forgiveness.
- Amend the 941s.
- Wait for your refund.
The ERC claiming process can be tedious, which is why it’s recommended to partner with an ecommerce accountant. In addition, there are tax implications of claiming the credit to keep in mind. For one, the IRS requires businesses to reduce the wages used to claim the ERC on the tax return. This results in an increase in taxable income. However, in the year the ERC is received, the income is non-taxable.
The matching principle also applies when claiming the ERC. This means that if you are using wages from 2020 to claim the credit, you will need to reduce wages on the 2020 tax return, resulting in the need to amend tax returns. To properly amend your returns, reach out to an accountant for amazon sellers or a Shopify CPA.
Another key component of claiming the ERC is that businesses cannot double dip on wages used for PPP loans. Wages used to qualify for PPP loan forgiveness cannot be used to claim the ERC. For example, if you pay an employee $10,000 in one quarter and use $6,000 for PPP loan forgiveness, you only have $4,000 of ERC wages remaining. This is another reason to work with an ecommerce CPA firm.
How Long Does the Employee Retention Credit Take to Receive?
The ERC isn’t direct deposited into your bank account the next week. It can take anywhere between three and nine months to receive your refunds. The refunds will come in the form of a check and by mail. If you receive any correspondence asking for bank account information, do not respond as this is most likely a phishing attempt.
Summary
Do you think your business might qualify for the ERC? If so, it’s important that you work with a qualified ecommerce accounting firm to maximize the money going back into your pocket. Additionally, you want to be sure you are correctly reporting the credit on your business tax return to reduce your risk of receiving a letter from the IRS. Reach out to one of our team members today to learn more.
