You likely already know that the employee retention credit (ERC) is a good deal—if you qualify.
Now, thanks to the recently enacted American Rescue Plan Act of 2021 (ARPA), you can qualify for up to $100,000 of ERC in the third and fourth quarters of 2021 if you1
- begin the business after February 15, 2020 (you could start today),
- have average annual gross receipts of $1 million or less, and
- do not meet either of the ERC tests—the suspended operations test or the gross receipts test —in place before ARPA was passed.
Finding the $100,000
When you meet the three requirements above, you qualify as a recovery start-up business and, as such, can claim an ERC of up to $50,000 in both the third and fourth quarters of 2021.2
It works like this: your recovery start-up business ERC is equal to 70 percent of the qualified wages paid to each employee (up to $10,000 per employee per quarter), with an overall maximum credit of $50,000 per quarter.
Recovery Start-Up Business Example
In April 2021, you start a new retail store as a sole proprietorship business.
You project your gross receipts to be as follows:
- Second quarter—$50,000
- Third quarter—$60,000
- Fourth quarter—$100,000
In addition, you hire three full-time sales staff whom you pay hourly. Each earns $2,800 in wages each month.
For the fourth quarter, you hire an additional part-time salesperson and pay that person a total of $4,000 in November and December 2021.
Your proprietorship business qualifies as a recovery start-up business and is eligible for the ERC in the third and fourth quarters of 2021.
For the third quarter of 2021, your total ERC is $17,640:
- You have three employees who were paid $8,400 each during the quarter. No employee exceeds the $10,000 wage maximum for the quarter.
- Total qualified wages for the ERC are $25,200 ($8,400 x three employees).
- Your credit is 70 percent of $25,200, or $17,640.
Fo·r the fourth quarter of 2021, your total ERC is $20,440:
- You have three employees who were paid $8,400 each during the quarter, and one employee who was paid $4,000 during the quarter. No employee exceeds the $10,000 wage maximum for the quarter.
- Total qualified wages for the ERC are $29,200 ($8,400 x three employees + $4,000 for the part-time employee).
- Your credit is 70 percent of $29,200, or $20,440.
For tax year 2021, you receive total employee retention tax credits of $38,080.
But you need one more step to calculate your net benefit. You can’t deduct wages in tax year 2021 equal to the ERC earned during the tax year; therefore, your net business income increases by $38,080 for tax year 2021.3
If you pay a federal and state income marginal tax rate of 27 percent on that income, you’ll pay extra tax of $1·5,663:
- $10,282 in federal and state income taxes, and
- $5,381 in self-employment tax.
Net result. You have $22,417 more in your pocket this year from claiming the ERC. That’s a nice leg up for a business that started in April 2021.
ARPA added a big incentive for starting a new business. It works like this: your business can qualify for the ERC on 70 percent of the qualified wages paid to each employee (up to $10,000 per employee for each of the last two quarters of 2021), with an overall maximum credit of $50,000 per quarter.
To qualify for the third- and fourth-quarter ERC incentives, your business had to begin after February 15, 2020.
The big deal with the two quarters of 2021 is that your business has to be new, but it does not have to suffer from COVID-19 stresses. In fact, it can’t qualify for the recovery start-up business special deal if it otherwise qualifies under the suspended operations test or the gross receipts test.