Employee Retention Tax Credits (ERC) – What You Need to Know

The Employee Retention Tax Credit (ERC) was designed to help businesses retain their staff during the pandemic. While the Investment and Jobs Act retroactively ended the ERC in late 2021, businesses still have time to claim this credit.

The ERC can bring qualifying businesses some cash relief, but does yours qualify? What exactly is the ERC and how does it work?

What’s the ERC (Employee Retention Credit)?

The ERC was added as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act, which went into law in March 2020, implemented measures to help businesses keep their employees on the payroll.

The ERC gives small and medium-sized businesses up to 50% of qualifying wages paid between March 12th and December 31, 2020. The credit has a limit of $5,000 per employee, and businesses that received a loan under the Paycheck Protection Program can still qualify for the ERC.

The Consolidated Appropriations Act 2021 (CAA) further extends this credit to 70% of qualifying wages paid to employees and some health insurance costs through the end of 2021. The limit is $10,000 in qualifying wages per employee per quarter for the first three quarters of the year. As a result, you can claim a $7,000 credit per quarter per employee, which equates to a maximum credit of $21,000 per employee.

Who Qualifies for the ERC?

Unless your business was launched after February 15, 2020, eligibility for this tax credit is dependent on your 2019 records. If your company had no more than 500 employees in 2019, you might be eligible for this credit. If your business was shut down due to pandemic restrictions, you likely qualify.

Here are a few essential things to know:

  • To qualify, your gross receipts in 2020 and 2021 must be a minimum of 20% lower than the same quarter in 2019. 
  • If you have 100 full-time employees or less, you may be eligible for a 100% wage credit, whether your business is open or impacted by a lockdown order.
  • If you have more than 100 full-time employees, you may be eligible if you pay employees while not providing services because of COVID-19 restrictions. In other words, you continued to pay employees even though you weren’t operating.

Only private or tax-exempt organizations can qualify for this credit. To qualify, your business must have encountered either of the following in 2020 or 2021:

  • A partial or complete shutdown of operations due to COVID-19 limits on commerce.
  • Gross receipts that were 50% or less than the same quarter in 2019.

If your business suffered a significant decline in gross receipts in 2020 or 2021, there’s still time to claim this tax credit. 

How Does it Work?

There are several factors used to calculate the ERC. First, here’s a quick recap of what the credit offers for qualifying businesses:

  • For 2020, the credit provides 50% of all qualified wages paid to employees between March 12, 2020 and the end of the year. The cap is $10,000 in wages for each employee for all quarters or a maximum credit of $5,000 per employee.
  • For 2021, the credit provides 70% of all qualified wages paid to employees during the first three quarters of the year. The cap is $10,000 in wages per employee. As a result, you can claim $7,000 credit per employee per quarter, with a maximum credit of $21,000 per employee.
  • If your business is considered a recovery startup business that launched after February 15, 2020 and had annual gross receipts of no more than $1 million, you have different limitations. Wages paid through Dec. 31, 2021 are eligible for the credit, with a total credit limited to $50,000 per calendar quarter.

It’s important to note that the credit can only apply to wages that were not forgiven under the PPP. 

In order to receive the ERC, you’ll need to report your total qualified wages and associated credits for every calendar quarter on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. 

Assuming you qualify and claim the credit, this will impact the total wages reported on your income tax return for the associated year. Be sure you amend any impacted income tax returns as a result. We recommend that you work with your accountant as a part of this process to ensure no stone goes unturned. 

Other Important Things to Know About the ERC

Along with the points above, there are a few other important things to know about the ERC.

  • You cannot claim the ERC and the tax credit for providing paid leave for COVID-19 for the same wages. These wages need to be kept separate.
  • You can still claim the ERC even if you received a PPP loan. 
  • If your business received a shuttered venues operator grant or restaurant revitalization fund grant, you cannot claim wages paid with these grant funds under the ERC.

IRS Notice 2021-49

The IRS provides some guidance on the ERC via Notice 2021-49. The notice covers qualifying wages paid between June 30, 2021 and January 1, 2022. 

The notice also clarifies some questions pertaining to 2020 and 2021 ERC credits, such as:

  • Definitions of full-time employees and their equivalents
  • How tips should be treated under qualified wages 
  • The timing of the qualified wages deduction disallowance
  • Handling wages paid to spouses and majority owners
  • Whether you need to file an amendment 

All of these clarifications apply to the entire ERC period. Businesses that miscategorized wages as qualified wages will need to file amendments using Form 941.

Final Thoughts

It’s not too late to claim the ERC, and your business may still be eligible. Let’s be honest though, it’s a complicated process and one you want to have a professional help you with. Our consulting company can work with you to help determine whether you qualify for the credit, and if you do, they can help you apply for the credit.

Claiming the ERC can provide your business with cash relief and is worth exploring to see whether you are eligible.

Ready to find out if you’re eligible? Email Keith Hanson today to get started: keith.hanson@blwinvestments.com.