Starting a New Business? Get Up to $100,000 in Tax-Free Money

In these turbulent times and what feels like an unsteady economy, who wants to open a business? The US government wants you to!

If you have ever thought about starting a business or maybe opening new possibilities to supplement your revenue, this is the time. The Government is making one of the greatest efforts in modern history to try and keep our country and economy on track. This means opening new businesses, creating new jobs, and hiring workers. The only way that can get done is with people like you and I. The government needs us to open new businesses to help stimulate the economy. Why now? What is in it for you? Believe it or not, the government doesn’t want you to open your doors only to see them closed in a couple of months. So they are making it worth our while.

What incentive is there to take such a leap into the unknown?

How about $100,000. Is that incentive enough for you?

Most people have heard of the Payroll Protection Plan (PPP). There is its lesser known sibling the Employee Retention credit (ERC) it means just that the government gives you tax credits for keeping your employees on payroll. Now the PPP and the ERC can be combined, so you can be eligible for both credits! We covered this in article You must choose one: PPP or Employee Retention Credit? Not any more!

Thanks to the latest congressional act the AMERICA RESCUE PLAN ACT of 2021 (ARPA) -not to be confused with AARP- 😉 As a new business owner you may qualify for up to $100,000 of ERC in the third and fourth quarters of 2021. thi is is what you need to qualify:

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.

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. Also, let’s not forget you may still be eligible for the PPP if the funds are still available. The government has extended the life of the funding until May 31st.

What makes a Recovery Startup you ask?

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.

For 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.

The Glitch in the Matrix

Since nothing is ever as simple as we would like, there is something you need to take into account with the ERC. to figure out the total benefit of the program here is how it works.

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- the amount of the ERC credit you are receiving. If you pay a federal and state income marginal tax rate of 27 percent on that income, you’ll pay extra tax of $15,663:

$10,282 in federal and state income taxes
- If you happen to work in a state that doesn’t have state income tax (Whoo Hoo for you!)
$5,381 in self-employment tax.

End Results:

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.

For this an more article to help you succeed in business check out the rest of our blog