Picture it: USA early 2020. A busy holiday season of shopping and socializing has passed, leaving the country in the quiet wake of winter. Americans are heading to the gym and pretending to enjoy vegetables.
At the time, it was just a normal new year. Your New Year’s Resolution may have been to finally start that business you’ve been thinking about for years. Things were calm at work, the kids were back in school, and the weather was too gray and cold to get out much.
So you took the leap and became a small business owner. Little did you know how drastically the world was about to change! But since you’d already committed to start the business and invested time and money in it, there was no turning back.
COVID-19 threw you, as a new small business owner, into the fire. And there was no handbook or well-worn path to guide you through it. But here you are, almost two years later, scarred and weary and still in business!
Thanks to your tireless efforts to sustain your business (AND the U.S. Economy) Congress created a special provision within the Employee Tax Credit for Recovery Startup Businesses.
Since the inception of the Employee Tax Credit, Whirks has assisted small businesses in claiming more than $30 million in employer payroll tax credits. Our staff possesses a foundational understanding of the Internal Revenue Service (IRS), and want to use our expertise to benefit small businesses.
This article will allow you to know if you are a Recovery Startup Business if you qualify for the Employee Retention Tax Credit, how to claim the credits, and how much money could get back from the IRS.
*This article is written explicitly for Recovery Startup Businesses. If you are a small business owner that started operations after February 15, 2020, then keep reading. Read this article on the Employee Retention Tax Credit if you are looking for general information or started your business before February 2020.
What are the requirements to be a Recovery Startup Business?
So, let’s figure out if your business meets the definition of a Recovery Startup Business. That way you’ll know if you should continue reading.
Section 3134(c)(5) of the IRS Code defines “recovery startup business” as a business that meets all of these requirements:
- An employer that began a trade or business operation after February 15, 2020, (including 501(3)(c) non-profits)
- Average annual gross receipts of less than $1 million
- Employ one or more employees (other than 50 percent owners)
- Not eligible for ERTC because of government-mandated closure or suspension (full or partial) or a 20 percent or more decline in sales revenue.
Businesses that meet the Recovery Startup requirements can only claim the ERTC for the last two quarters of 2021. It is the only category of businesses that are able to claim the tax credit for the final quarter of 2021.
A company could qualify for the ERTC as a Recovery Startup Business in Quarter 3 of 2021 and qualify for it under one of the other rules in Quarter 4 or visa versa. The other two options for eligibility (in 2021) are at least a 20 percent decline in sales revenue or subject to a government-mandated shutdown.
It’s also possible to qualify for the employee retention tax credit as a Recovery Startup Business during the final two quarters of 2021 and also qualify under the standard rules in 2020 or 2021.
Disclaimer: As with all things related to the Internal Revenue Service, there are exceptions, special circumstances, and nuances that determine not only how much an employer could benefit from the ERTC, but also the funds, time frame, and reasons used to qualify. Be sure to refer to the most recent IRS guidance around Recovery Startup Businesses.
Brief overview of the creation of Recovery Startup Businesses and ERTC
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), which included the ERTC, to offset the impact of COVID-19 and encourage employers to keep full-time employees on their payrolls.
The Consolidated Appropriations Act of 2021(approved in late 2020) allowed employers to claim both the Paycheck Protection Program loan and the ERTC, just not on the same employee wages.
In March 2021, Congress approved the American Rescue Plan (ARP) Act, which created the definition of Recovery Startup Business and included it as a means to claim the Employee Retention Tax Credit.
The Infrastructure Investment and Jobs Act amended the ERTC one last time to end eligibility at the end of 2021’s third quarter, EXCEPT for Recovery Startup Businesses. Recovery Startups can claim the ERTC for the third and fourth quarters of 2021.
How much is the Employee Retention Tax Credit for Recovery Startups?
Employers can receive a 70 percent refund on a maximum of $10,000 per employee per calendar quarter for the last two quarters of 2021. Congress placed a $50,000 cap on Recovery Startup tax credits per quarter. But $100,000 in tax credits is nothing to sneeze at.
For example, if you qualify as a Recovery Startup Business in Q3 of 2021:
You employed 8 “average full-time” employees.
Each employee earned $10,000 in wages (& tips) during Q3.
70 percent refund on $80,000 or
(8 EEs x $7,000 ) = $56,000
As a Recovery Startup, your max refund is $50,000.
If you qualify as a Recovery Startup in Q4 of 2021:
You employed 5 “average full-time” employees.
Each employee earned $10,000 in wages and tips during Q4.
70 percent refund on $50,000 or
(5EEs x $7,000) = $35,000
What are eligible wages?
In qualifying quarters, eligible wages are all wages and health insurance benefits paid to an employee working for a small business. This does include tips paid out through payroll.
What does the IRS mean by “average full-time employee”?
Full-time employees work at least 130 hours per month. Add all the employees that worked more than 130 hours per month and divide by 12; this is your average number of full-time employees and how to determine if you are a large or small business.
If I have a Recovery Startup Business, how can I claim the Employee Retention Tax Credit?
The ERTC is claimed on IRS Form 941 or Form 7200. You file your quarterly employment taxes using Form 941 and can claim the tax credit there.
If you have already filed your 2021 third and fourth quarter taxes, you can amend them to claim the ERTC by filing IRS Form 941-X. You can amend quarterly employer tax filings up to three years after the original due date. So, if you filed Quarter 4 employment taxes on January 10, 2022, you have until January 10, 2025 to file an amended return.
You can also claim the ERTC using Form 7200, which is called Advance Payment of Employer Credits due to COVID-19. Use this form when filing for advance credits or planning to decrease your quarterly tax deposit based on your estimated ERTC.
Since we’ve entered 2022, your payroll provider should’ve already briefed you on your eligibility as a Recovery Startup. But if they haven’t, and you think you qualify, Whirks can help you claim your tax credits.
If you plan to file Form 7200, the deadline is January 31, 2022. You must fax the completed form to the IRS at (855) 248-0552.
Claim the ERTC as a Recovery Startup Business Today
With my mind on my money and my money on my mind
After all your hard work creating a small business during a global pandemic, you deserve a break! And strangely enough, Congress created one for you in the form of a tax credit as a Recovery Startup Business.
And now that you know the Recovery Startup requirements and ERTC eligibility rules, and that you could get up to $100,000 in employer tax refunds, it’s time to take action.
As a newly-created small business, you may not have contracted with a payroll partner, and you can’t handle another “to do” on your list. If that’s the case, contact Whirks to get started claiming those ERTC funds. We’ve helped small businesses get more than $30 million in employee retention tax credits.