Employee Retention Credit in 2021: Opportunities for Startup Businesses

By Jonathan Tretter, CPA on August, 11 2021
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Jonathan Tretter, CPA

Employee Retention Credt 2021

Did you start a business after February 15, 2020? If you can answer “yes”, you MAY be eligible for a maximum $50,000 per quarter refundable Employee Retention Credit in Q3 and Q4 of 2021, for a grand total of $100,000.

The Employee Retention Credit for tax year 2021 is a refundable payroll tax credit based on 70% of qualified wages paid to each employees up to a maximum credit amount of $7,000 per employee, per quarter ($10,000 of wages per employee per quarter). Employers claiming ERC under the Recovery Startup Businesses clause are limited to a maximum credit claim of $50,000 per quarter in total.

As part of the American Rescue Plan Act signed into law in March 2021, there are enhanced provisions for Q3 and Q4 for “Recovery Startup Businesses” to be eligible for the Employee Retention Credit without having to show a significant decline in gross receipts or a full or partial suspension of operations due to a Government order.

If this is the first time you’ve heard about the Employee Retention Credit, please review our previous blogs to learn more:

What is a “Recovery Startup Business”?

The term “Recovery Startup Business” identifies any employer that:
  • a) Began carrying on any trade or business after February 15, 2020,
  • b) Whose average annual gross receipts for the 3-taxable-year period ending with the taxable year which precedes the calendar quarter for which the credit is determined under subsection (a) does not exceed $1,000,000.

Gross Receipts Test for Recovery Startup Businesses

The gross receipts rules will mainly apply to recovery startup businesses whose owners operate and own other trade or businesses that have been in operation prior to 2/15/20. The gross receipts test requires aggregation of all related business and entities based on common ownership to prevent an established business with average gross receipts over $1M from starting a “new” entity just to claim the credit.

If you are an entrepreneur who decided to start a new business and hire employees after February 15, 2020, you could be eligible for a potential $100,000 refundable tax credit. However, each situation is different, so facts and circumstances must be evaluated on a case by case basis to determine eligibility and to be aware of the limitations.

The 2/15/20 Line of Demarcation

Startup business established after 2/15/20 were not eligible for the Paycheck Protection Program so they missed out on up to two rounds of enormous government relief during the pandemic. To reward new businesses that started over the last 18 months, the Employee Retention Credit for Recovery Startup Businesses, represents the government’s effort to level the playing field for new businesses that previously missed out on government relief.

Additional Insight and Guidance

If you believe you might be eligible for the Employee Retention Credit as a Recovery Startup Business, The Freed Maxick Tax Team is prepared to help you navigate through the program and are available for a complementary consultation to this end.

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