There’s still time to claim the Employee Retention Credit (ERC) for eligible wages paid in 2020 and 2021, if your business qualifies.
What is the Employee Retention Credit (ERC)?
The ERC is a refundable tax credit for businesses that continued to pay employees while they were partially or completely shut down due to the COVID-19 pandemic or had significant declines in gross revenue from March 13, 2020 to Dec. 31, 2021.
Business Eligibility Criteria
To qualify for the ERC, a business must meet one of the following criteria:
- The business experienced a full or partial suspension of operations due to a government order related to COVID-19.
- The business experienced a significant decline in gross revenue in 2020 or a significant decline in gross revenue during the first 3 quarters of 2021.
- The business qualified (in the 3rd and 4th quarters of 2021) as a Recovery Startup Business, which is defined as the following:
- A business started on or after February 15, 2020.
- A business with annual gross revenue that doesn’t exceed $1 million for the 2020 and 2021 tax years.
- A business with one or more W2 employees, not including owner-operators or family members.
The ERC is calculated based on qualified wages and health expenses paid to employees. Different rules apply to businesses depending on their size:
- For businesses with more than 100 full-time employees or 500 full-time employees, the credit can only be claimed for wages paid to employees not working due to a suspension of business operations or a substantial reduction in gross revenue.
- For businesses with 100 or fewer full-time employees or 500 or fewer full-time employees, the credit can be claimed for all employee wages, whether those employees were working or not. This includes qualified health plan expenses during an eligible quarter.
Note: A full-time employee, for the purposes of the ERC, is one who worked at least 30 hours per week or 130 hours in a month in 2019.
Claiming the ERC
Employers may retroactively claim the ERC by reporting their qualified wages and health expenses on their Quarterly federal tax returns. Businesses have until April 15, 2024, to file amended returns for Q2, Q3, and Q4 of 2020, and until April 15, 2025, to file amended returns for all 2021 quarters.
Employers may claim an ERC credit for up to 50% of qualified wages paid between March 12, 2020 and Dec. 31, 2020. And for the 2021 calendar year, eligible employers can claim a credit for up to 70% of qualified wages paid to employees after Dec. 31, 2020. Qualified wages are capped at $10,000 per employee each quarter.
Employers may also claim an ERC credit for health plan expenses, up to 25% of qualified wages.
- When claiming the ERC, businesses should be aware of the following:
- Tipped wages: Tips are considered part of qualified wages if they’re subject to FICA. Tips totaling less than $20 in a month are not subject to FICA and do not qualify for the ERC.
- Owner/spouse wages: Wages paid to majority owners and their spouses are not considered qualified wages for the ERC.
- Other credits: Employers cannot double-dip by claiming the ERC on wages that are also claimed on the paid family leave credit or the Work Opportunity Tax Credit (WOTC). And employers cannot claim the ERC for wages that were funded and forgiven (or will be forgiven) under the Paycheck Protection Program (PPP).
Frequently Asked Questions About ERC
Q: Can businesses claim the ERC if they have received a PPP loan?
A: Yes, businesses that have received a PPP loan and will be forgiven for it may now be eligible for the ERC on certain wages. However, employers cannot double-dip by claiming the ERC on wages that are forgiven or expected to be forgiven under PPP.
Q: What are the recordkeeping requirements for businesses claiming the ERC?
A: Employers should maintain documentation supporting their eligibility for the ERC, such as records of government orders causing full or partial suspension of operations, and financial records demonstrating a significant decline in gross receipts. Employers must also retain records justifying the use of funds from other programs, such as the Shuttered Venue Operators Grant (SVOG) or Restaurant Revitalization Fund (RRF).
Q: What should businesses do if they incorrectly claimed the ERC in previous quarters?
A: If wages were previously misclassified as qualified wages for the ERC, employers must file an amended Form 941 to correct any errors. Failure to do so could result in penalties. However, the opposite is also true: If businesses mistakenly failed to claim the ERC when they’re qualified to do so, they can amend their quarterly tax return to claim the credit.
Our firm now has many clients who have received refunds and “fixed” many of the financial problems they brought to us. Until the ERC expires, we’ve started our intake process by asking if they’ve amended their payroll tax returns to obtain refunds of up to $6,000 per full-time employee per quarter for the periods covered. Some clients believe they don’t qualify as they didn’t suffer a drop in income or have more than 500 employees. They couldn’t be more wrong. Even some businesses with more than 500 employees total may still qualify for parts of the ERC. Reach out to us today so that we can connect you with resources that can help you determine if you qualify for the ERC.