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Get a tax refund for your sick days.

If you missed work due to COVID-19-related reasons, the government wants to pay you back—even if you were self-employed. You may be eligible for a tax credit from the Internal Revenue Service (IRS)—and this credit is available now, retroactively, for lost income/work in 2020 and 2021. 

The Family First Coronavirus Response Act, also called FFCRA, was signed into law in March 2020, and among other things, addressed paid sick leave and unemployment benefits. One of the many benefits of the FFCRA was that it provided tax credits to eligible self-employed individuals — including 1099 and gig workers— for sick days and family leave related to the COVID-19 pandemic. 

This tax credit is different from a deductible, as it directly reduces the total tax owed to the IRS. You can apply for this credit retroactively for 2020 and 2021, which means you could still receive a check in the mail if you haven't already claimed it.

What is the FFCRA tax credit for self-employed individuals?

The FFCRA is widely known among employers with W-2 employees, as they can provide paid time off or sick leave to their workers based on specific circumstances outlined in the following section. However, many self-employed individuals, such as 1099 contractors or consultants, may not be aware that they are also eligible for this COVID-19 tax credit, and it can be applied retroactively.

How does the FFCRA work?

The FFCRA is a tax credit that allows employers to get reimbursed for time you weren’t able to work due to the effects of COVID-19. Here are some of the reasons you could qualify. They don’t all have to apply to you, but if one or more of these things happened to you, you are likely eligible. You should apply if missed work because you were:

1. Following a federal, state, or local quarantine or isolation order
2. Advised by a healthcare provider to self-quarantine
3. Experiencing coronavirus symptoms and were seeking a medical diagnosis
4. Caring for a child or other individual, who was subject to a government-issued or self-quarantine restriction, as described in #2
5. Caring for a child whose school or daycare was closed or unavailable
6. Obtaining a COVID-19 vaccination
7. Recovering from illness related to the COVID-19 vaccine
8. Seeking or waiting for the results from a  COVID-19 test

Note: Criteria 6-8 only apply from April 1, 2021, through September 30, 2021. 

If you were an employee on the W2 form in 2020 or 2021, your employer might have already claimed the maximum credit, making you ineligible. However, if you were both self-employed and a W2 employee, you could qualify for a tax credit under FFCRA, provided your employer didn't already claim the maximum FFCRA tax credit.

How much money will I get from the FFCRA as a 1099 contractor or self-employed individual?

If eligible, you can receive up to a maximum of $32,220 in tax credits, which consists of:

For the period of April 1, 2020, through March 31, 2021:

10 days of emergency paid sick/family/medical leave

• Taking care of yourself: Claim the lower of either your average daily self-employment earnings or $511 per day
• Taking care of someone else: Claim the lower of either 67% of your average daily self-employment earnings or $200 per day

50 days of emergency paid sick/family/medical leave

• Daycare or school closure: Claim the lower of either 67% of your average daily self-employment earnings or $200 per day 

For the time period of April 1, 2021 - September 30, 2021, you may receive an additional 10 days of paid sick leave and 60 days of family leave. 

Am I eligible for the FFCRA credit? You might qualify if you:

1. Were a 1099 contractor or self-employed individual anytime between March 2020-September 2021;
2. AND Took unpaid sick leave to care for yourself or a family member;
3. OR Had to stay home to provide childcare due to a government-issued or self-quarantine restriction. 

How will I receive my COVID-19 FFCRA credit?

Most applicants will have the option to receive a direct deposit via ACH for 2021 tax returns. For 2020 returns, the tax credit amount will be delivered via a mailed check from the IRS. (Disclaimer: delivery method is dependent on not having any outstanding tax liabilities.

If you had employees on the payroll during the COVID-19 pandemic, you could claim up to $26,000 in tax credits for each one, using the Employee Retention Credit (ERC). However, your credit amount depends on the qualified wages paid to your workers. 

To help you determine how much you can claim, let’s explore what counts as qualified wages for the Employee Retention Credit.

What are Qualified Wages For the Employee Retention Credit?

The Employee Retention Credit is a refundable payroll tax credit designed to provide relief to businesses that paid their employees despite facing economic strain from the COVID-19 pandemic.

You must meet a hardship requirement to claim the credit unless you’re a recovery startup business. That means experiencing economic strain in the form of a decline in your gross receipts or a suspension of your operations.

If you’re eligible, you can claim the ERC for a portion of the qualified wages you paid each employee in 2020 and 2021. More specifically, you can claim 50% of their first $10,000 in 2020 and 70% of their first $10,000 in each quarter of 2021, excluding the fourth. That’s a total of $26,000 each.

In addition to employee salaries, qualified wages include certain health plan expenses you incurred to maintain their group health plan, plus whatever costs they covered through pre-tax salary reduction contributions.

There may also be limitations on which employees qualify for the credit. If you meet the criteria to be a “large employer,” you can claim only the credit for the qualified wages you paid to those not providing services in 2020 and 2021. Here’s how it works:

If you had less than 100 employees on average in 2019, then the wages you paid to all your employees are qualified for 2020. If you averaged more than 100 employees, then only the wages you paid to employees who weren’t working are qualified that year.

For the 2021 tax year, the threshold increased to 500 employees. Wages paid to all your workers are qualified, if you averaged less than 500 in 2019. Otherwise, only non-working employee wages are qualified for 2021.

Examples of Qualified Wages

Like many aspects of the Employee Retention Credit, the qualified wages rules are complicated and challenging to grasp in the abstract. To help you understand how they work, let’s look at a few practical examples.

Qualified Wages for Small Employers

Say you own a cleaning business that’s had ten employees on the payroll since 2015. Each receives a $35,000 salary and costs you $5,000 in qualified health plan expenses annually. Three stopped providing services between September 31, 2020, and March 31, 2021, but you kept them all on the payroll.

In 2020 and the first three quarters of 2021, you have a significant enough decline in gross receipts to be eligible for the ERC. And because you only had ten employees on average in 2019, you’re considered a small employer in both years.

As a result, you can claim the ERC for the qualified wages you paid to all your employees. Fortunately, with $35,000 in salaries and $5,000 in health plan expenses, each earns $10,000 in eligible compensation per quarter, just enough to maximize your credit.

In 2020, you can claim 50% of the first $10,000 for ten employees, which is $50,000. In 2021, you can claim 70% of the first $10,000 for ten employees each quarter. That’s $21,000 for each employee in 2021, which is $210,000.

Qualified Wages For Large Employers

This time, say you own a cleaning business that’s grown large enough to operate across the state, with a whopping 750 employees on the payroll. However, 250 of your workers provided no services between September 31, 2020, and June 30, 2020. 

For simplicity's sake, we’ll assume that they each have $40,000 in qualified compensation per year, and you experience a decline in gross receipts that makes you eligible for the ERC in all periods.

Because you averaged 750 employees in 2019, you’re considered a large employer for 2020 and 2021. As a result, you can only consider qualified wages paid to workers not providing services when calculating your tax credit amount.

In 2020, you can claim 50% of the first $10,000 paid to the 250 workers that stopped working on September 31. All would have earned $10,000 apiece in that final quarter of 2020, so you could claim $1.25 million in tax credits that year.

In 2021, you can claim 70% of the first $10,000 paid to those same workers in each of the two quarters they weren’t providing services. As a result, you can claim $14,000 for 250 employees that year, which is $3.5 million.

Can Owner Wages Qualify For the ERC?

If you structure your business as a corporation, you can pay yourself an annual salary. That raises the question of whether or not owner wages qualify for the Employee Retention Credit.

Unfortunately, the answer is probably not. It isn’t strictly forbidden, but it’s unlikely that you’ll meet the requirements to be able to do so. If you’re a majority owner with more than 50% of the stock, you’d need to have no living ancestors, siblings, or descendants.

If you’re a minority owner with less than 50% of the stock, your wages should be eligible if you don’t share ownership with your relatives. That all seems a little arbitrary, so let’s explore the reasoning.

The Internal Revenue Service (IRS) ruled that wages you pay to employees related to majority owners of your company don’t qualify for the ERC. A majority owner of a corporation owns at least 50% of the company’s stock. Their relatives are people with whom they have one of the following relationships:

• Child or a descendant of a child
• Brother, sister, stepbrother, or stepsister
• Father or mother, or an ancestor of either
• Stepfather or stepmother
• Niece or nephew
• Aunt or uncle
• Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

The IRS has also ruled that “constructive ownership and familial attribution” rules apply to this situation. These state that people own the stock of their living ancestors, siblings, and descendants, by extension.

As a result, through slightly circular reasoning, any majority owner with at least one of these relatives is technically related to someone with majority ownership by extension. Therefore, their wages are ineligible for the ERC.

Example of Ineligible Majority Owner Wages

Say that you own 100% of Corporation A. You also have a big family, including a daughter. Because she has a qualifying relationship with you, a majority owner, the IRS also considers her a majority owner of Corporation A by extension.

Unfortunately, as her father, you have a qualifying relationship with her, too. And because she’s a majority owner, any wages paid to you are ineligible for the ERC.

Example of Ineligible Minority Owner Wages

This time, say you own 34% of Corporation A. However, you share ownership of the company with your two siblings. Each owns half the remaining shares, with 33% ownership each.

Because you’re all siblings, the IRS treats you all as if you own each other’s shares for the sake of the ERC. That means each of you effectively owns 100% of the company due to family attribution rules, making you all majority owners by extension.

As a result, each of you has a qualifying relationship with a majority owner, and none of the wages paid to you qualify for the ERC.

Apply For the Employee Retention Credit

Eligible employers who paid qualified wages to their employees during 2020 and 2021 can claim thousands of dollars through the ERC. While the period to earn the credit has passed, you still have time to claim them retroactively before the deadline.

Learn More: If you have more questions about the Employee Retention Credit or qualified wages, our other resources may be able to help:

• Frequently Asked Questions

The Employee Retention Credit is among the most lucrative tax credits available to small business owners in 2023. However, it can be pretty tough to navigate, especially the credit calculation.

Let’s discuss how to calculate the Employee Retention Credit in detail, walk through a few practical examples, and explore some background information to help put everything into context.

How Does the Employee Retention Credit Work?

The Employee Retention Credit (ERC) is a refundable payroll tax credit designed to lessen the financial strain on small business owners who kept their employees on the payroll during the COVID-19 pandemic.

The credit’s main eligibility requirement is an economic hardship test. To clear it, you must demonstrate that your business experienced a sufficient decline in gross receipts or suspended a more than nominal portion of its operations due to a government order.

Determining whether you satisfy one of those requirements is a fairly involved process. But if you do, then you should be able to claim a tax credit for a percentage of the wages your business paid in 2020 and 2021.

How to Calculate the Employee Retention Credit

Under the regular ERC rules, you can claim a credit for 50% of the first $10,000 in qualified wagesyou paid each employee during 2020. In 2021, you can claim 70% of each employee’s first $10,000 in qualified wages per quarter. That means you can claim up to $26,000 in refundable tax credits per employee between both years. 

To calculate your ERC amount, you must determine which wages qualify under the credit. That primarily depends on the number of full-time employees you had on the payroll during the 2019 calendar year.

If you had less than 100 employees on average during 2019, then you can treat the wages paid to all your employees as qualified in 2020. If you exceeded that threshold, only the wages you paid to employees not providing services qualify for the ERC that year.

In 2021, the maximum number of employees for the determination increased to 500, but you still base it on your 2019 staff count. In other words, all your wages are qualified in 2021 if you had less than 500 people on the payroll in 2019. Otherwise, only the wages paid to your inactive employees qualify for the credit.

When calculating the qualified wages paid to your employees, you can also add your group health plan expenses. That includes your portion of the costs as the employer and any pre-tax salary reduction contributions from your employees.

How to Calculate the ERC as a Recovery Startup Business

If you started your business during the pandemic, you probably won’t be able to qualify for the ERC through the regular method. After all, most of the default qualification requirements involve analyzing a business’ activities in 2019.

However, you may still be able to qualify for the ERC as a recovery startup business. These are organizations that started doing business after February 15, 2020, average less than $1 million in annual gross receipts, and fail both versions of the economic hardship test in at least the third quarter of 2021.

If you meet these requirements, you can claim the ERC for 70% of the first $10,000 in qualified wages paid to each employee in the third and fourth quarters of 2021. In fact, only recovery startups can claim the credit for wages paid after September 30, 2021.

However, they also have a $50,000 quarterly limit. As a result, you can claim only $100,000 in total for those two quarters as a recovery startup.

ERC Calculation Examples

Now that we’ve covered how to calculate the Employee Retention Credit in theory, let’s walk through a few examples to demonstrate how it works in practice.

Small Employer in 2020

Say you own a restaurant with ten employees on the payroll in 2019 and 2020, each earning a $40,000 annual salary. You continued to pay them all throughout 2020, even though five employees didn’t work after March because you shut down dine-in services to comply with federal social distancing mandates.

Let’s assume that qualifies as a partial suspension of your operation, making you eligible to claim the ERC that year. Because you had less than 100 employees on average in 2019, the wages you paid to all your employees were qualified.

For 2020, you can claim a credit for 50% of each employee’s first $10,000 in qualified wages that year. All your employees reached that limit, so you can claim $5,000 for each one. Because you have 10 eligible employees, you can take a $50,000 ERC that year.

Large Employer in 2021

Say you own a nonprofit organization with 600 employees on the payroll in 2019, 2020, and 2021. Each of them had a base annual salary of $50,000. However, 200 workers stopped providing services from January 1, 2021, to June 30, 2021, during which you paid them only half their usual salaries.

Because you averaged more than 500 employees in 2019, only the wages you paid to those 200 employees who weren’t working are qualified. Let’s also assume you saw a decline in gross receipts during those months that was sufficient for the hardship test.

You can claim 70% of the first $10,000 in qualified wages paid to each non-working employee in the first two quarters of 2021. With 200 employees, that gives you $1.4 million each quarter, resulting in a $2.8 million total ERC.

Recovery Startup Business

Finally, say you start a landscaping business with 10 employees on May 1, 2020. It has less than $1 million in average annual gross receipts and fails the economic hardship test in all periods, making it a recovery startup business.

You pay each of your employees $80,000 in wages yearly. As a recovery startup business owner, you can claim a tax credit for 70% of their first $10,000 in qualified wages for the third and fourth quarters of 2021.

Because all of your workers reached the $10,000 limit each quarter, you can claim $7,000 for each one. With 10 employees, you should be able to take a $70,000 ERC each quarter and a $140,000 credit for the year.

However, your organization is a recovery startup business, so your credit amount can’t exceed $50,000 in a single quarter. As a result, you can claim only $100,000 for the 2021 calendar year.

Apply For the Employee Retention Credit

As these calculations demonstrate, the Employee Retention Credit is an incredibly lucrative opportunity for business owners. If you qualify, you could reduce your federal tax liability by thousands of dollars, potentially resulting in a refund.

It’s too late to earn the ERC, but you still have time to claim the credit retroactively by filing Form 941-X with the Internal Revenue Service for each eligible quarter. The deadline is April 15, 2024, for quarters in 2020 and April 15, 2025, for quarters in 2021.

If you’d like help determining whether you qualify for the ERC, let our convenient application tool walk you through everything. Once you confirm your eligibility, it can also streamline the filing process for you. Give it a try today.

Learn More: If you want to know more about the Employee Retention Credit before you move forward, our other resources may be able to help:

• Frequently Asked Questions
• What You Need to Know About the ERC

The Employee Retention Credit (ERC) is one of the most lucrative tax credits for small business owners. Fortunately, if you had employees on the payroll during the COVID-19 pandemic, you can still claim it retroactively.

To help you understand how you might qualify, let’s review how the ERC works and walk through some practical examples of eligible businesses.

How Does the Employee Retention Credit Work?

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the Employee Retention Credit in 2020. Its goal was to provide financial relief to small businesses and encourage them to retain their employees.

The ERC works as a refundable tax credit. You can deduct it from your payroll tax liability and pocket any excess amounts. As a result, it’s even more beneficial than a tax deduction, which can only reduce your taxable income.

To be eligible for the ERC during 2020 or 2021, you must pass the following three tests during the period for which you want to claim the credit:

1. Your business was a private sector or tax-exempt organization.
2. Your business paid qualified wages to employees.
3. Your business experienced hardship in one of the following areas:

• You were forced to suspend your business’ operations, including limiting commerce travel or group meetings, fully or partially due to COVID-19 government orders, or
• You experienced a sufficient decline in gross receipts.

Businesses that pass these tests can claim a tax credit for a portion of each employee’s qualified wages. The 2020 limit is 50% of their first $10,000 that year. The 2021 limit is 70% of their first $10,000 per quarter until September 31, 2021, unless you’re a recovery startup business. That’s a maximum credit of $26,000 per employee.

While you can no longer earn the ERC, you still have time to claim it by filing Form 941-X for each eligible quarter. For quarters in 2020, you have until April 15, 2024. For quarters in 2021, the deadline is April 15, 2025.

What are Qualified Wages?

The definition of qualified wages under the ERC is surprisingly complex and deserves additional clarification. Most notably, your average number of employees in 2019 determines which wages qualify for the credit.

If you had 100 or fewer employees on average during 2019, wages paid to all employees in 2020 are qualified. If you averaged more than 100 employees during 2019, only wages paid to employees who weren’t providing services are qualified.

In 2021, the threshold increased to 500 employees. In other words, if you averaged 500 employees or less in 2019, all wages in each 2021 quarter are qualified. If you averaged more than 500 employees in 2019, only those paid to workers not providing services qualify in 2021 quarters.

What is a Suspension Due to a Government Order?

You must also understand what constitutes a full or partial suspension of operations due to a government order. Let’s look at the suspension of operations aspect first. To pass this test, “more than a nominal portion” of your operations must shut down.

For an aspect of your business to be more than nominal in a given quarter of 2020 or 2021, it must meet one of the following tests in the corresponding 2019 quarter:

• Its gross receipts constituted 10% or more of your total gross receipts.
• Hours worked by the portion’s employees were 10% or more of all hours worked.

Finally, a governmental order refers to official proclamations or decrees from the federal, state, or local government that "limit your commerce, travel, or group meetings due to COVID-19.”

What is a Sufficient Decline in Gross Receipts?

Finally, let’s expand upon what constitutes an eligible decline in gross receipts. Unfortunately, the rules are a little different between 2020 and 2021.

In 2020, you can show a sufficient decline in gross receipts for only one continuous period. It starts in the first calendar quarter that your receipts fall below 50% of receipts in the same quarter of 2019. It ends in the quarter after they first rise to 80% of 2019 receipts.

In 2021, you can test for an eligible decline in gross receipts on a quarterly basis. You can claim the ERC for each quarter that your gross receipts are below 80% of receipts for the same quarter in 2019, even if they’re discontinuous.

Employee Retention Credit Examples

As you can see, the ERC eligibility requirements are complicated. To help you understand them, let’s look at some in-depth examples of eligible employers, explain why they qualify for the ERC, and calculate their credit amounts.

Example 1: Partial Suspension

A restaurant had 20 employees on the payroll in 2019, 2020, and 2021. It paid everyone a $40,000 salary each year, even though half of the workers provided no services between April 1, 2020, and December 31, 2020.

The restaurant closed dine-in services to comply with federal social distancing mandates on March 15, 2020, but remained open for take-out. The government order ended on March 30, 2021. Throughout 2019, dine-in services generated 65% of the restaurant’s gross receipts.

As a for-profit business that operated in 2020 and 2021, the restaurant passed the first test for the ERC in both years. Because it continued to pay its workers during the pandemic, it also cleared the second.

Dine-in services generated 65% of the restaurant’s gross receipts in 2019, making it a more than nominal portion of operations. Because the social distancing mandate came from the federal government, it was a qualified government order. That means the restaurant passed the hardship test from March 15, 2020, until March 30, 2021.

Now we can calculate the restaurant's ERC amount. Because it averaged less than 100 employees in 2019, all wages were qualified in 2020. Since everyone had a $40,000 salary, each earned more than $10,000 during the eligible period.

With the ERC limit being 50% of their first $10,000, the restaurant's 2020 ERC is $5,000 for 20 employees, which equals $100,000.

Now, let’s calculate the amount for 2021. Since the restaurant averaged less than 500 employees in 2019, all employee wages qualified in 2021. However, the 2021 ERC limit is 70% of the first $10,000 per eligible quarter. Because the government order ended on March 31, 2021, only the first quarter is eligible in 2021.

With $40,000 salaries, each worker earned $10,000 per quarter, so they all reached the cap during the first quarter of 2021. As a result, the restaurant could claim 70% of $10,000 for 20 workers for that year, giving it a $140,000 credit.

Ultimately, the restaurant could claim a $240,000 ERC.

Example 2: Significant Decline in Gross Receipts

A 501(c)(3) charitable organization had 550 employees on the payroll from 2019 to 2021. Each employee had a $60,000 annual salary for all three years.

The charity had 250 employees stop providing services from April 1, 2020, to the end of the year. It put 125 of them back to work on January 1, 2021. The rest resumed working on March 31, 2021.

The organization received the following donations during that three-year period, which were its only gross receipts:

As a nonprofit organization that continued to operate during 2020 and 2021, this charity satisfied the first requirement for both years. Because it continued to pay wages to its full-time employees in 2020 and 2021, it also met the second one.

The charity also passed the hardship test in both years. It experienced a significant decline in gross receipts starting in the second quarter of 2020. $12 million in gross receipts is less than 50% of the $25 million received in the equivalent quarter of 2019.

The decline continued through 2020 because gross receipts in the remaining quarters never exceeded 80% of the gross receipts in the corresponding 2019 quarters.

In 2021, the charity saw a decline in gross receipts in the first and third quarters. $18.5 million and $19.5 million are less than 80% of the $25 million received each quarter in 2019.

Now we can calculate the ERC amount, starting with 2020. Because the charity averaged more than 100 employees in 2019, only wages paid to workers not providing services were qualified.

The 2020 eligible period was the second quarter through the end of the year. During that time, 250 workers were not providing services. With $60,000 annual salaries, they all earned $10,000 in that period. As a result, the charity could claim $5,000 for each of them, equaling a $1.25 million ERC in 2020.

In 2021, the first and third quarters were eligible for the ERC. However, 125 workers resumed working on January 1, 2021, and everyone else did so by March 31, 2021. Because the charity averaged more than 500 employees in 2019, only wages paid to those not providing services were qualified for the year.

As a result, the charity can claim the ERC for only 70% of the first $10,000 paid to the 125 employees not working in the first quarter. Since they all earned more than $10,000 during that time, the charity’s ERC for the year would be 70% of $10,000 for 125 employees, which equals $875,000.

That puts the charity’s total ERC at $2,125,000.

Apply For the Employee Retention Credit

As you can see, the ERC can be incredibly lucrative. If you qualify but fail to claim your tax credit, you could leave thousands of dollars on the table. Fortunately, it’s not too late to apply, and our easy-to-use application tool can guide you through the process from start to finish. Give it a try today.

Learn More: If you have further questions about the ERC due to unusual business circumstances, our other ERC resources may be able to help:

• ERC Frequently Asked Questions
• From the Expert: What You Need to Know About the ERC

Setting up a business isn’t an easy feat. Even more difficult is finding and maintaining funding and cash flow to support day-to-day operations. 

According to a study by the U.S. Bank, as quoted in this Business Insider article, 82% of businesses fail mainly because of poor cash management. Cash is the lifeblood of your business, and no matter what your profits are, your actual cash will be the thing that keeps your business up and running.

Perhaps you can find funding through personal borrowings from friends or family, but not every entrepreneur has the luxury or opportunity to do the same. At this point, most businesses can only turn to business credit to secure funding from lenders and banks.

The catch? 

Lenders and banks generally consider your business credit before offering help—and for good reason. This article will dive into everything about building business credit in 30 days.

What is Business Credit, and Why is It Important?

Think of business credit as your personal credit score. 

A better business credit score gives a company more access to funds from lenders and banks because of a good track record in availing and repaying debt.

Like your own personal credit score range companies with good business credit scores can access more cash with lower interest rates than companies with bad credit scores. The latter group are definite red flags to lenders, as they are the ones who are most likely to repay loans late or just not pay at all.  

How to Build Business Credit 

Building business credit is a process, not an end goal. Good business credit is built upon years and years of good repayment track records. 

If you’re looking into building your business credit, it should start from the moment you create your business plan. Here are steps on how to start building your business credit:

1. Identify the Right Structure For Your Business

To build a business credit, it is important to identify the kind of structure you would want for your business. There are three primary business structures you may want to consider:

• Sole proprietorship
• Partnership
• LLC/Corporation

The disadvantage of being a sole proprietor or a partnership in determining your business credit is that business credit is closely tied to the personal credit standing of the owner or partners. 

Why? Because, in a sole proprietorship and partnership, owners and partners are personally liable for all the gains and losses of the business—including its debts. Therefore, when a sole owner has terrible credit standing, creditors are less likely to extend loans for your business, as well.

On the other hand, businesses established as corporations create a separate legal entity from its managers and directors, so the company's credit standing is separated from its owners and directors.

“There is a term called ‘corporate veil’ for businesses established as corporations,” says Andrew Pierce, Founder of Real Estate Holding Company. “This corporate veil protects the management and the shareholders wherein they are only liable to the extent of their shareholdings, and their identities and financial standing does not legally affect the organization.”

There are some exceptions to the corporate veil, such as a personal guarantee for a business loan or if personal and business accounts are mixed.

2. Maintain a Separate Bank Account For Your Business

Business owners should establish that the company is independent of the owners when trying to build good business credit. 

Creditors will look at your business' financial records, including the inflow and outflow of cash, and having a separate bank account solely for your operations will make the job easy for you and your creditors. 

The better and the easier they see that your financial standing is positive and you have good cash flow management, the more trustworthy your credit standing looks and the more access you’ll have to funds. 

Jim Pendergast, senior vice-president at altLINE Sobanco, states, “Even for sole proprietors, it is discouraged to keep personal and business finances in one account. Some credit investigators look at things at face value, and mixing personal and business accounts is a red flag for blurring the lines between personal and business liability.”

In addition, mixing your personal and business accounts puts you in danger of mishandling your cash, spending personal finances on business expenses, and vice versa, and eventually puts you in a pinch regarding future legal documentation, money trail, and managing business tax computations.

3. Establish Trade Lines

The most popular form of trade line to build your business credit is net-30s, which can also be called supplier or trade credits. 

The idea behind it is simple: businesses negotiate with their vendors to give them a 30-day term for payment upon delivery of goods or performance of service. When these vendors report to one of the three credit bureaus—Dun and Bradstreet, Experian, or Equifax—this will help start businesses and build business credit.

“Net-30 terms aren’t only beneficial for buyers, but for suppliers as well,” says Gerald Lombardo, CEO of cauZmik. “Offering flexible terms, together with discounts for early payments, like 2/10 net 30 terms, gives a strong incentive for customers and also helps expand your brand and market,”

The catch, though, is that signing up for a net-30 account requires filling out an application form and paying a small sign-up fee. Nonetheless, net-30 is similar to vendors extending you a 30-day interest-free loan, which will significantly help improve business credit when paid on time. 

4. Keep Your Bills Paid in Full and On Time

This remains true for personal and business credit integrity. Still, many people don’t realize how vital it is to regularly pay your bills and dues on time and in full. It prevents you from having bad business credit and saves you costs from interest and surcharges from late or nonpayment of account.

“While many factors go into your credit score, your payment history has the biggest impact on it, accounting for 30% to 40% of the total score in the formula,” says Anthony Martin, Founder and CEO of Choice Mutual. “Paying on time and in full will not necessarily magically bump up your scores, but leaving them unpaid and delinquent will negatively affect your record.”

5. Keep Your Personal Credit Score in Check

Unfortunate as it may seem, yes, your personal credit score affects your business credit, especially for sole proprietors and small businesses. Vice versa, bad business credit can also negatively affect your personal credit.

You can keep your personal credit score in check by making timely and full payments and increasing your credit utilization rate. However, there are still remedies in which you can separate personal and business credit:

• Get a separate business credit card to use for all business expenses.
• Incorporate your business.
• Create a separate receipt for your business.
• Carefully separate personal and business transactions.

6. Regularly Check Business Credit Agencies

Credit bureaus are only as good as the data being fed to them, so it is essential for businesses to regularly check with the credit bureaus for any discrepancies and misreporting that may have been incorrectly attributed to calculating their business credit score.

According to Experian, checking business credit reports will give you the following:

• Financial information
• Credit score and risk factors
• Banking, trade, and collection history
• Liens, judgment, and bankruptcies

While this data can help those extending credit, this will also help businesses monitor credit standing and contest incorrect credit report information through a Data Dispute form, which can be settled in as little as 30 days or longer for complex cases.

Personal credit bureaus are different from business credit bureaus. For business credit bureaus in the United States, you can refer to Dun & Bradstreet, Experian, and Equifax as the three major providers of business credit reports. 

According to Stephan Baldwin, Founder of Assisted Living, “Many people find communicating with credit bureaus daunting. However, to avoid erroneous records reflected on your account—bankruptcies, foreclosures, or late payments—which negatively impact your credit score, it is best to make sure to reach out to credit bureaus and regularly check your credit score and related information therein.”

Wrapping Up

Not all debts are bad, especially when these debts or loans are leveraged to the advantage of the business. Building your company’s business credit in 30 days starts from the moment you create a business plan, followed by availing of trade credits, getting separate credit cards, and making sure these accounts are paid on time.

Building business credit is not a short-term process, but rather an accumulation of good business practices that would make you a credible and trustworthy organization to be extended access to more funding.

If you qualify for the Employee Retention Credit (ERC), you could receive thousands of dollars in refundable tax credits for each employee on your payroll during the COVID-19 pandemic. Fortunately, there’s still time for you to claim those funds.

Let’s break down the qualification requirements to help you determine whether your small business is eligible.

What are the ERC Eligibility Requirements?

The Employee Retention Credit eligibility requirements include three primary tests. Regular employers that pass all of them can potentially claim the tax credit for 2020 and the first three quarters of 2021. Here’s what you should know about how they work.

Eligible Organization

The first ERC eligibility requirement is the most straightforward and easiest to clear. You must be an employer that operated a trade, business, or tax-exempt organization during 2020 or 2021.

If you're a small business owner running a company that’s been around since before the pandemic, then you generally don’t have to worry about this test. It primarily prevents governmental entities from claiming the ERC.

Pay Qualified Wages

The second ERC eligibility requirement is where things start to get more complicated. To pass this test, you must have paid qualified wages to your employees. That sounds simple, but the definition of qualified wages varies depending on how many employees your business had on the payroll in 2019.

If your average number of employees in 2019 was below certain thresholds, then the wages you paid to all employees in 2020 and 2021 can qualify for the ERC. If it was above those thresholds, only the wages you paid to workers not providing services are eligible.

For 2020, the threshold is 100 employees. For 2021, the cutoff increased to 500 employees. Note that you should calculate your average number of employees in 2019 on an annual basis, not a quarterly one.

For example, say you had an average of 150 employees on the payroll in 2019. That puts you above the threshold for 2020, and only wages paid to workers not providing services would qualify for the ERC that year. However, you’re below the threshold for 2021, so wages paid to all employees would qualify that year.

Experience Economic Hardship 

The third ERC eligibility requirement is the most complex and usually the one that ultimately determines whether or not you can claim the tax credit. To pass this test, you must have experienced economic hardship due to the COVID-19 pandemic in one of the following ways:

• You were forced to suspend your business’ operations, including limiting commerce travel or group meetings, fully or partially due to COVID-19 government orders, or
• You experienced a significant decline in gross receipts.

Let’s take a closer look at what each of these tests mean.

Suspension of Operations

There are two parts to this test that you must understand. Let’s start with the government order aspect since it’s the most straightforward. It refers to mandates from federal, state, or local regulators that limit your commerce, travel, or group meetings due to COVID-19.

This does not include unofficial recommendations from public servants or self-imposed restrictions. If you’re not subject to a specific government order, you can’t satisfy the hardship requirement through this method.

The second aspect of this test is to have a “full or partial suspension of operations,” which is a bit more complicated. To clear it, you must shut down a “more than nominal portion” of your business.

Upon the initial passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, there was a lot of controversy over what this term meant. However, the Internal Revenue Service (IRS) eventually confirmed that a portion of your business must pass one of the following tests to be considered nominal:

• Its gross receipts equaled 10% or more of your total gross receipts
• Its employees worked 10% or more of your workforce’s total hours worked

Once again, these requirements are based on the 2019 calendar year. For example, say you own a restaurant that offers dine-in and takeout services. In 2019, dine-in services generated between 60% and 75% of your annual gross receipts.

Because that aspect of your operation generated more than 10% of your total gross receipts in 2019, it constitutes a more-than-nominal portion of your business. If you stopped offering dine-in services to comply with a government order during 2020 or 2021, you’d be eligible to claim the ERC in that period.

Sufficient Decline in Gross Receipts

As an alternative to showing a suspension of operations, you can prove that you experienced economic hardship through a sufficient decline in gross receipts. This is another complex test, and the rules differ between the 2020 and 2021 calendar years.

In 2020, you can have a decline in gross receipts for only one continuous period. It can cover multiple quarters, but they must be uninterrupted. For example, you couldn’t qualify in the first and third quarters without the second.

An eligible decline begins in the first quarter that your gross receipts fall below 50% of receipts in the same 2019 quarter. It ends in the quarter after your receipts rise above 80% of receipts in the corresponding 2019 quarter.

Meanwhile, in 2021, you can test for a sufficient decline on a quarterly basis. Each one passes the test when its gross receipts are below 80% of gross receipts in the same 2019 quarter. For example, say your business had the following gross receipts:

In 2020, an eligible decline in gross receipts starts in the second quarter—as $45,000 is less than 50% of $100,000—and continues through quarter three. Quarter four is the only ineligible one that year, as it’s the first quarter after receipts rise above 80% of 2019 numbers.

In 2021, any quarter with receipts below 80% of the receipts in the same quarter from 2019 passes this test. As a result, you’d qualify for the ERC in the first and third quarters, but the second and fourth would be ineligible.

Recovery Startup Businesses

The default ERC eligibility requirements generally apply to organizations established before the COVID-19 pandemic. That’s why so many of them involve comparing 2020 and 2021 numbers to those from corresponding periods in 2019.

However, the American Rescue Plan (ARP) was enacted in 2021 to extend ERC benefits to certain businesses that began their operations in the middle of the pandemic. These companies are known as recovery startup businesses.

If you’re a recovery startup business, the eligibility requirements for the ERC are substantially different than those for regular employers. Here are the requirements your operation must meet to claim the ERC as a recovery startup for a given quarter:

• Start doing business after February 15, 2020
• Have at least one W-2 employee on the payroll 
• Average less than $1 million in annual gross receipts during the three-year period ending in the tax year before the quarter

An additional eligibility requirement applies to the third quarter. Namely, you can't pass the decline in gross receipts or suspension of operations tests. If you do, you must claim the credit for that quarter as a regular employer, not a recovery startup business.

To clarify, filing as a recovery startup business in either of these quarters will not prevent you from doing so in the earlier quarters as a regular employer.

Recovery Startup Business ERC Example

Like the regular ERC qualification rules, the recovery startup eligibility requirements are complicated. Let’s look at an example to help you understand how they work.

Say you opened a digital marketing agency on June 1, 2020. You have five full-time employees on the payroll taking home $50,000 salaries, and your new business generated $400,000 in gross receipts by the end of the year.

You started doing business after February 15, 2020, and had multiple W-2 employees on the payroll, so you meet the first two requirements for a recovery startup business. All that’s left is to confirm that you meet the $1-million gross receipts test.

Since you weren’t in business before the 2020 tax year, that’s the only year you must consider here. But because you were only open for part of the year, you have to annualize your numbers.

To do so, divide the $400,000 received in 2020 by the number of months you were open that year, then multiply the result by 12. Since you started doing business on June 1, divide $400,000 by seven and multiply it by 12 to get $685,714. Fortunately, that’s well below the $1 million threshold.

Assuming you don’t pass the decline in gross receipts or suspension of operations tests for the third quarter of the year, you can file as a recovery startup for the third and fourth quarters of 2021.

Apply for the Employee Retention Credit

The ERC is a refundable payroll tax credit. That means you can subtract it directly from your annual payroll tax liability, and if there’s any left, you can take it to the bank. That makes the ERC significantly more impactful than a tax deduction and too valuable an opportunity to miss.

If you think you satisfy the Employee Retention Credit qualification requirements, there’s still time to claim your funds by filing IRS Form 941-X for each eligible quarter. The deadline is April 15, 2024, for quarters in 2020 and April 15, 2025, for those in 2021.

Fortunately, our ERC application guide can walk you through confirming your eligibility, filing the necessary forms, and securing your funds. Don’t wait–get started today.

Learn More: If you have additional questions about your business’ ERC eligibility due to unusual circumstances, our other resources may be able to help:

• Frequently Asked Questions
• What You Need to Know About the ERC

Many entrepreneurs need some type of funding to get their business ideas off the ground. But you might be surprised to learn that nearly 54% of small business owners use personal finances in the startup phase. 

Of course, not everyone has the ability or the desire to self-fund. So, some business owners may consider an alternative way to use their personal assets to their advantage. Instead of using your own cash to fund your business initiative, you could consider using personal assets as collateral to help secure more affordable financing solutions. 
One potential funding option that some small businesses owners use is a home equity loan. Because you use the value in your home as collateral to secure this type of financing, home equity loans are often a cheaper way to borrow money compared with other loan options. Yet there are drawbacks to putting your home equity on the line for your business as well.

How To Use A Home Equity Loan For Your Business

Home equity is the difference between how much you owe on your home (aka your mortgage balance) and its market value. Between 2021 and 2022, accessible homeowner equity in the United States rose by 18%. Many homeowners took advantage of their increasing home values, and, in 2022, home equity loan originations in the U.S. went up by 47%, according to TransUnion. This increase represented the largest volume of home equity loans on record in over a decade. 

Homeowners can use the equity in their homes to secure affordable financing in the form of a second mortgage. Debt consolidation, home improvement projects, and big-ticket purchases are some of the most popular reasons people take out home equity loans (and home equity lines of credit, as well). Yet it’s not uncommon for entrepreneurs to sometimes take advantage of the value they have built up in their homes for business-related goals, too. 

If you want to use a home equity loan as a source of business financing you’ll need to first find a lender that allows you to use the loan proceeds for business purposes. From there, you must satisfy the lender’s qualification requirements to receive a loan. 

Qualifying For A Home Equity Loan

Every lender has different requirements that applicants must satisfy when they apply for financing. But if your goal is to take out a home equity loan for your business, here are some of the general requirements a lender may expect you to meet. 

• A credit score that satisfies its mandatory minimum cutoff point
• Proof of your ability to repay the loan 
• A satisfactory debt-to-income ratio
• A satisfactory loan-to-value ratio (LTV)

Understanding LTV

LTV is a measurement of your property’s value compared to its mortgage amount. Many home equity providers may let you borrow up to 80% of the value of your home, though exact LTV limits can vary. 

Here’s how LTV can impact your borrowing limits with a home equity loan. Imagine you owe $300,000 on a home that appraises for $400,000. In this scenario you have $100,000 worth of equity, but you wouldn’t be able to borrow that amount. If a lender limits LTV to 80%, you might qualify to borrow up to $20,000. The $300,000 you owe on your first mortgage, plus the $20,000 you want to borrow on the second mortgage ($320,000 total), would equal 80% of the current value of the home. 

Pros And Cons Of Using A Home Equity Loan For Your Business

Before you tap into your home equity as a funding source for your business, it’s important to take a close look at the benefits and drawbacks of this type of financing. 

Pros

• Easier approval criteria - Home equity loans tend to be easier to qualify for compared with traditional business loans or SBA loans. 
• Lower interest rates - Because you’re pledging your home as collateral, there’s less risk involved for the lender. This typically translates into lower interest rates for the borrower by extension. 
• Higher loan amount - Depending on how much equity you have available in your home, you might be able to qualify for a larger loan amount with a home equity loan than you could with another source of business financing. 
• Longer repayment period - Home equity loans often feature lengthier repayment periods compared with other business financing options. 

Cons

• Your house at risk - If you’re unable to make the payments on your home equity loan, the lender could foreclose on your home and resell it to recuperate its loss. And with around 65% of small businesses failing by their tenth year in business, according to the U.S. Bureau of Labor Statistics, using a home equity loan to finance your business is a big gamble to take as a small business owner. 
• Good personal credit needed - If you hope to qualify for the most attractive interest rates and borrowing terms, you’ll typically need good personal credit to receive these offers from lenders. Bad personal credit, meanwhile, could lead to a loan denial.
• No business credit building - Taking out a home equity loan won’t help you establish business credit for your company. 

Home Equity Loan Vs. HELOC

When you research home equity loans, you’re sure to come across a similar home-equity based financing product, the home equity line of credit (HELOC). HELOCs are another type of financing that is secured by the equity you have built up in your home. But HELOCs and home equity loans have a few key differences that you’ll want to understand. 

• Fixed vs. variable interest - In general, home equity loans feature fixed interest rates. This provides borrowers with a predictable, unchanging payment amount throughout the life of their loan. In contrast, HELOCs usually have variable interest rates that can go up or down with the market. 
• Lump sum loan amount vs. credit limit - When you take out a home equity loan, you receive a lump sum amount from a lender to use as you see fit (as long as you don’t violate any of the lender’s terms). A HELOC, by comparison, works more like a credit card. With a HELOC, a lender extends a line of credit that you can access up to a certain amount (aka your credit limit). As you repay the debt you owe (plus any interest and fees you owe), you can borrow against the same line of credit again up to the credit limit. 
• Collateral and risk - As a borrower, you pledge the equity in your home to secure both home equity loans and HELOCs. So, if something goes wrong and you fail to repay either type of debt, you risk losing your home to the lender.

Alternatives to Using a Home Equity Loan For Your Business

Using a home equity loan to finance your business could be an affordable way to secure the funding you need. However, it’s also a high-risk decision as a borrower. If you have any doubts about your ability to repay the full debt, it’s not a good idea to put your home on the line for your business. 
The good news is, there are many other types of business loans that could help you accomplish your goals. Even if you’re in need of a first-time business loan for your company, you have numerous options to consider. As you research loan choices, be sure to compare offers from multiple lenders to make sure you find the right fit for your business.

Small businesses looking for an infusion of cash could benefit from up to $400 billion in refundable tax credits through the Employee Retention Credit program based on a Lendio analysis of internal and SBA data. Signed into law as part of the CARES Act to provide relief during the COVID-19 pandemic, the Employee Retention Credit allows qualifying small businesses who retained W-2 employees throughout 2020-2021, to claim up to $26,000 per W-2 employee. 

On average businesses that apply through Lendio receive $74,000 through the ERC. Qualified businesses with less than two W-2 employees average $13,000, and companies with 25+ W-2 employees average $302,000. 

Based purely on the number of small businesses and the number of W-2 employees at those businesses the highest potential amount totals up to $1.5 trillion, but after going through complex qualification criteria, businesses get, on average, $7,000 per W-2 employee out of the maximum $26,000. 

Full qualification requirements include:

2020 qualifications:

• Qualifying wages of up to 100 full-time W-2 employees;
• A decrease in gross revenue of at least 50% compared to the corresponding quarter in 2019;
• Or either a full or partial suspension of business operations created by a government mandate 

2021 qualifications:

• Qualifying wages of up to 500 full-time W-2 employees
• At least 95% of businesses in every state have less than 500 employees
• A decrease in gross revenue of at least 20% compared to the corresponding quarter in 2019
• Or either a full or partial suspension of business operations created by a government mandate

ERC Opportunity By State

By combining SBA data on:

• Number of small businesses in each state in 2020 and 2021
• Number of small business W-2 employees in each state in 2020 and 2021

With Lendio data on the typical credit amount small businesses qualify for, Lendio found the potential dollar amount available to SMBs in each state.

States Most Likely To Qualify

While Lendio’s analysis found potential money available largely aligns with the population of each state, certain states and industries are more likely to have businesses who qualify for the Employee Retention Credit based on the number of government mandates that impacted businesses and how broadly pandemic precautions impacted certain industries.

Businesses in the following states are most likely to qualify for the Employee Retention Credit based on being above average in the following variables:

• Average number of qualifying quarters
• Percent of the qualifying quarters revenue was impacted
• Percent of the qualifying quarters a government order impacted that industry
• Percent of the time there was no government order
• Average last date of government order

ERC Opportunity By Industry

The following industries are most likely to qualify for the Employee Retention Credit based on being above average in the following variables:

• Average number of qualifying quarters
• Percent of the qualifying quarters revenue was impacted
• Percent of the qualifying quarters a government order impacted that industry
• Percent of the time there was no government order
• Average last date of government order

Advice For Small Businesses

Recent news around ‘ERC Mills’ taking advantage of small businesses is a great reminder to all small business owners to work with reputable companies when filing their tax credit. Lendio has been supporting small businesses for over a decade and has facilitated more than 350,000 small business loans in addition to facilitating more than $10 billion in PPP loan and ERC approvals as part of government COVID-19/CARES Act relief.

The qualification criteria for the ERC have evolved over time. Credible ERC professionals can help you navigate these details and maximize your refund. 

If you are qualifying due to a full or partial suspension rather than a decline in gross receipts, providing detailed documentation of how your business was impacted by a government order is key to ensuring your application is approved. 

• Was your ability to provide goods or services to your customers affected? Did foot traffic in your store go down by 10, 20, 30%? Or did you lose half of your contracts because Zoom meetings didn’t cut it? There are lots of ways to be specific here.
• Were any external businesses impacted by government orders that then impacted your normal operations? If you had a hard time getting supplies from vendors, let us know the dates, vendor names, and details.
• Visit our ERC FAQs for more information about the Employee Retention Credit.

If in doubt about whether you’ll qualify for the money, still apply for free. You may be surprised by what you can qualify for. 

Sources

Lendio Proprietary Data

ERC Pros Proprietary Data

2020 SBA state profiles

2021 SBA state profiles