Introduction
The COVID-19 pandemic has had a significant impact on businesses worldwide, with many experiencing a drop in revenue or even temporary shutdowns. To support these struggling businesses, the Employee Retention Credit (ERC) was introduced as a refundable tax credit. In this comprehensive guide, we will explore the eligibility criteria, credit limits, claiming process, and tax implications of the ERC. Whether you are an Amazon seller, a Shopify merchant, or an e-commerce business owner, understanding the ERC and working with a skilled CPA can help you navigate this complex credit and maximize your benefits.
What is the Employee Retention Credit (ERC)?The Employee Retention Credit, also known as the ERC or ERTC, is a refundable payroll tax credit aimed at encouraging employers to retain their employees during the COVID-19 pandemic. This credit is available to businesses and tax-exempt organizations that had employees and were affected by the pandemic.
Eligibility for the ERC
Determining eligibility for the ERC involves meeting specific criteria related to business operations and revenue. There are two main ways to qualify for the ERC:
- Suspension of Operations: If your business experienced a full or partial suspension of operations due to government orders in any quarter, you may be eligible for the ERC. Even if your business did not fully shut down, you could still be eligible. Consulting with an Amazon FBA CPA or a Shopify accountant can help you determine your eligibility.
- Gross Receipts Decline: Another way to qualify for the ERC is by demonstrating a significant decline in gross receipts. For 2020, a significant decline means having less than 50% of gross receipts compared to the same calendar quarter in 2019. In 2021, businesses only need a 20% decline in gross receipts compared to the same quarter in 2019. It's important to work with a CPA for Amazon sellers or a Shopify CPA to navigate the specific rules and calculations related to gross receipts.
Credit Limits for the ERC
The ERC has different credit limits for the years 2020 and 2021. Understanding these limits is crucial to accurately calculate your credit amount. Here are the key details:
- 2020: In 2020, the maximum credit per employee for the year is $5,000. This credit is calculated as 50% of qualifying wages up to $10,000. For example, if you paid an employee $8,000 in qualifying wages in 2020, you would be eligible for a $4,000 credit.
- 2021: In 2021, the credit limits have increased. Employers can now claim up to $7,000 per employee per quarter. This amounts to 70% of wages up to $10,000 per quarter. For instance, if you paid an employee $9,000 in qualifying wages in Q2 2021, you would be eligible for a $6,300 credit for that quarter.
It's important to note that there are additional credit limitations and claiming abilities for startups. If you believe your business qualifies as a startup, consult with an Amazon seller accountant or a Shopify CPA to explore your options.
How to Claim the ERC
To claim the ERC, you need to file the appropriate forms and provide the necessary documentation. Since the ERC is claimed on the 941s, your Shopify CPA or Amazon FBA CPA may have already submitted these forms. However, if you haven't claimed the credit yet, here's an overview of the claiming process:
- Prepare Form 941-X: Your ecommerce CPA will need to prepare a 941-X, which amends your original filing to claim the ERC. Accuracy is crucial, as any errors or discrepancies could delay the processing of your claim.
- Avoid Double Dipping: It's important to note that you cannot claim the same wages for both the ERC and other COVID relief items such as Paycheck Protection Loans. Your Shopify accountant or Amazon accountant can help you identify which wages were allocated to other relief items to avoid double dipping.
- Refund Process: Refunds for the ERC can take anywhere between three and nine months to receive and will be issued in the form of a check. To expedite the process, it's essential to ensure the accuracy of your 941-X filing. Working with an ecommerce CPA can help ensure timely and accurate filings.
Tax Implications of the ERC
While the ERC provides businesses with much-needed financial relief, it's essential to understand the tax implications associated with this credit. Here's what you need to know:
- Taxable Credit: The ERC is not a tax-free credit. The wages used to claim the ERC will need to be added back to your federal taxable income for the corresponding year. For example, if you claim the ERC for 2021, your Amazon tax accountant may need to amend your 2021 return to report the increased wage amount.
- State Tax Considerations: It's important to note that state regulations regarding the ERC may differ from federal regulations. Some states consider the ERC as non-taxable, while others may have different rules. Working with a CPA for Amazon sellers or a Shopify CPA can help ensure you are properly claiming the credit when filing your state tax returns.
Beware of ERC Scams
As with any financial relief program, it's crucial to be aware of potential scams related to the ERC. The IRS has issued warnings about aggressive marketing and misleading advertisements claiming to help businesses claim the ERC. Here are some warning signs to watch out for:
- Unsolicited Ads: Be wary of unsolicited ads, calls, emails, or texts from individuals or companies claiming to determine your eligibility for the ERC within minutes.
- Large Upfront Fees: Avoid promoters who charge large upfront fees to assist with claiming the credit. The amount of the credit should not be a basis for their fees.
- False Eligibility Claims: Be cautious of promoters who claim that you qualify for the credit without thoroughly discussing your specific tax situation.
- Pressure to Submit Claims: Promoters urging you to submit ERC claims by stating that there is nothing to lose should be treated with skepticism. Improperly receiving the credit could result in repayment obligations, along with substantial interest and penalties.
To protect yourself from ERC scams, it's essential to stay informed and consult with reputable professionals such as Amazon FBA CPAs or Shopify accountants who can guide you through the legitimate claiming process.
Summary
The Employee Retention Credit is a valuable tax credit that provides financial relief for businesses affected by the COVID-19 pandemic. By understanding the eligibility criteria, credit limits, claiming process, and tax implications, you can navigate this complex credit and maximize your benefits. Working with a skilled ecommerce CPA, an accountant for Amazon sellers, or a Shopify accountant will ensure accurate filings and help you position your business for success. If you believe you may be eligible for the ERC, reach out to a reputable CPA today to explore your options and start the claiming process.
