Economic uncertainty tends to have a cascading effect. First, business owners get worried about the future and lay off employees. Then lost income forces employees to cut spending, and businesses lose more revenues.
That’s the scenario Congress wanted to prevent when the pandemic forced shutdowns and partial suspensions of business operations in 2020.
In response, they created the Employee Retention Credit (ERC), which was an invaluable lifeline for many businesses that struggled during the pandemic.
Learn more about the Employee Retention Credit, including how it works and who qualifies for it.
Employee Retention Credit Overview
The ERC is a tax credit created by Congress as part of the Coronavirus Aid, Relief, and Economic Security Act of 2020, also known as the CARES Act. It went through several expansions, extensions, and changes before it ended in late 2021. Unlike some other pandemic relief programs, the ERC is not a loan, and does not have to be paid back.
Here’s what it was worth to eligible employers:
- 50 percent of qualified wages (up to $10,000 in wages) paid to each employee for a maximum tax credit of $5,000 per employee
- 70 percent of qualified wages (up to $10,000 in wages) paid to each employee per quarter for Q1-Q3, for a maximum credit of $21,000 per employee
What are Qualified Wages for the Employee Retention Credit?
Qualifying wages include any salary or wages paid to employees during the quarter. It also includes qualified health plan expenses the company paid for those employees.
Who Qualifies for the Employee Retention Credit?
To qualify for the credit, your business or nonprofit organization must meet at least one of the following requirements in the calendar quarter they want to use the credit:
- The business was fully or partially closed due to a government order stemming from the COVID-19 pandemic, or
- The business had a significant decline in gross receipts
The definition of a “significant decline in gross receipts” was different for 2020 than for the 2021 calendar year.
For the 2020 tax year, the business must have seen a 50 percent drop in gross receipts for the quarter compared to the corresponding quarter in 2019. The business must also have 100 or fewer full-time employees, excluding the owners.
For 2021, the business must have had a 20 percent or greater drop in gross receipts for the quarter compared to the same quarter in 2019. The business must also have between 1 and 500 full-time W-2 employees, excluding the owners.
For the ERC, a full-time employee is one that works at least 30 hours per week or 130 hours in a month.
IRS rules allow new businesses—those who weren’t around in 2019—to use the gross receipts for the quarter they started business as a reference point for any quarter in which they don’t have 2019 figures.
How to Claim the Employee Retention Credit
Unlike many other tax credits available to small business owners, the ERC doesn’t offset income taxes. Instead, it’s a two-part credit. The non-refundable portion of the credit reduces the employer’s portion of Social Security or Medicare Tax. The refundable portion of the credit actually allows for a direct refund to the business.
Taxpayers had two options for claiming the credit:
- Reduce employment tax deposits by the amount of their expected credit. If the expected credit was more than their payroll tax deposits, taxpayers could request an advance payment by filing Form 7200.
- Claim the Employee Retention Credit on Form 941, Employer’s Quarterly Federal Tax Return, and receive a refund of previously paid tax deposits.
Since the ERC expired at the end of 2021, the only way to apply for the ERC going forward is to file an amended Form 941-X for a previous quarter in which you were eligible for the payroll tax credit but didn’t claim it.
Am I eligible for the Employee Retention Credit if I received a PPP loan?
Yes. Businesses that received a Paycheck Protection Program loan still qualify for the ERC. However, you can’t apply the credit to wages that were forgiven or expected to be forgiven under the PPP loan program.
For example, if you used PPP loan funds to pay for $50,000 of wages, and expect to qualify for PPP loan forgiveness, you can’t use those wages to calculate your ERC.
Is there a deadline to claim the Employee Retention Credit?
The Employee Retention Tax Credit was set to expire on January 1, 2022. However, the Infrastructure Investment and Jobs Act passed in November of 2021 retroactively moved up the expiration date to October 1, 2021 for most businesses.
For October through December of 2021, the credit is only available to recovery startup businesses.
A recovery startup business, as defined by the American Rescue Plan Act, is a new business that:
- Began operations on or after February 15, 2020, and
- Has average annual gross receipts of $1 million or less
If you qualified for the ERC during 2020 or 2021, you can file an amended Form 941X to retroactively claim the credit. The IRS generally gives you three years from the date you filed your original return or two years from the date you paid the tax to file an amended federal employment tax return.
Does the Employee Retention Credit have to be paid back?
No. The ERC is not a loan like the Paycheck Protection Program. It’s a fully refundable tax credit that employers can claim against applicable employment taxes.
Are the benefits of the Employee Retention Credit the same for large and small employers?
Businesses of any size can claim the ERC. However, large employers can only claim the ERC for employee wages and health care insurance premiums paid while employees weren’t working due to a pandemic-related shutdown.
For the ERC, a large employer is:
- 2020 Tax Year: an organization with more than 100 full-time employees
- 2021 Tax Year: an organization with more than 500 full-time employees
Clements, Purvis & Stewart Can Help You Claim Your Employee Retention Credit
If you are a business owner that needs assistance claiming your ERC, our team can help. We offer expert tax preparation and filing services that can simplify the process of claiming this credit. In addition, we provide support throughout every step of the process, from determining your eligibility to submitting the necessary documentation to the IRS.
We’ve prepared over $10 million in credits for businesses in our local community. If you haven’t taken advantage of the credit, it’s not too late! Contact us today.