Employee Retention Credit for Pre-Revenue Startups

The Employee Retention Credit (ERC) is a refundable credit worth $7K per employee per quarter for each 2021 quarter.

(Note: “refundable” means you get a check for the credit amount from the IRS. Yes, cold, hard cash!)

To qualify, there needs to be a 20% reduction of “Gross Receipts” in a 2021 calendar quarter compared to the corresponding 2019 quarter. If you qualify for one quarter, though, you automatically qualify for the next quarter.

The knee-jerk reaction for many pre-revenue startups is they do not qualify because they do not have revenue, BUT “Gross Receipts” include a lot more than just revenue. Examples are interest income, rewards, pitch competition awards, grants, etc. Also, there is no minimum dollar amount of Gross Receipts required.

Here’s a real-life example:

  • A startup incorporated and funded in 2019
  • $100 of Interest Income in Q1 2019
  • $75 of Interest Income in Q1 2021
  • No other Gross Receipts or Revenue
  • 20 employees in Q1 2021
  • Refundable Credit is $140K for Q1 2021
  • Q2 2021 automatically qualifies because of Q1 2021 qualification
  • Retest each 2021 quarter to determine that and subsequent quarter’s eligibility
  • If this startup qualifies for each quarter, it will receive $560K for the year (assuming 20 employees per quarter).

We are finding tons of startups that qualify. There are no strings attached to the funds that you receive for this credit. 

Taking the credit is also amazingly easy! You just check a box in Gusto (or applicable payroll provider), and the IRS sends you a check. It is that simple!

Let us know if we can help – this is a free Accountalent service open to ALL the startup community!

Check out our other blog posts on the Employee Retention Credit: