Tax season is upon us, and business leaders are making sure they have everything prepared. This includes looking into any type of tax credits they might be eligible for, such as the Employee Retention Tax Credit, or ERC.
A business relief provision included in the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, ERC could mean money back in your pocket. Yet, how much do you really know about it?
Today, we’re sharing 10 things you need to know about ERC and how it applies to you.
1. It Was Introduced in March 2020
There’s no denying that March 2020 ushered in some major changes for business owners. Everyone was suddenly trying to grapple with new COVID-19 protocols, shops were closing their doors, and many employees had shifted to a work-from-home model.
The CARES Act came when it was needed the most, with one intention: To encourage employers to retain their current employees through the pandemic, even if their operations were negatively impacted by the recent events.
The ERC was a provision included within the CARES Act. This is a refundable payroll tax credit with limits that differ by year. You can learn the basic details about it at https://tri-merit.com/erc/.
2. Qualifying Percentages Vary By Year
If you’re claiming the ERC for 2020, then you’re allowed a maximum of $5,000 credit per employee, per eligible quarter. That’s a maximum of 50% of their total qualifying wages ($10,000).
If you’re claiming the credit for 2021, then that maximum is increased to $7,000. That means you can claim up to 70% of the employee’s total qualifying wages.
3. Only Certain Businesses Can Claim It
Not every business will qualify to receive the ERC. It only extends to private-sector businesses or tax-exempt organizations (e.g. churches) that carry on a trade or business.
In addition, your company must meet at least one of these basic requirements:
- Experienced at least a partial shutdown due to government mandates that limited commerce, travel, or group meetings
- Experienced a significant decline in quarterly gross receipts due to the pandemic (much lower than their prior year’s quarterly gross receipts)
Regarding that last point, a “significant decline” means a drop of at least 50% in any calendar quarter during 2020, compared to that same quarter in 2019. For taxpayers seeking to file for the ERC in 2022, a “significant decline” means a drop of at least 20% in any calendar quarter until September 30, 2021, compared to that same quarter in 2019.
You can perform “tests” that prove you met the above requirements. Most companies find it easier to qualify using the Government Mandate (first bullet) test than the Gross Receipts Test (bullet 2).
4. It Ended in November 2021
The Infrastructure Investment and Jobs Act retroactively ended the ERC back in November 2021. Now, it only applies to any wages that your company paid before October 1, 2021. The only exception applies to organizations that officially qualify as recovery startup businesses.
If your business doesn’t fall into this category, then you can only claim the ERC credit for wages paid in the first three quarters of 2021. You cannot claim any wages paid in the fourth quarter.
Not sure if your company qualifies as a recovery startup business? To claim ERC eligibility for the fourth quarter of 2021, your business must meet both of the stipulations below, as well as the general eligibility guidelines:
- Started operating after February 15, 2020
- Received average annual gross receipts of less than $1 million
5. You Can Still Claim It
If you meet qualifying conditions, you can still apply to receive the ERC credit, even for wages that you paid way back in 2020. The statute of limitations for 2020 does not apply until April 15, 2024. Likewise, the statute of limitations for 2021 ends on April 15, 2025.
To do so, you’ll need to file an amended Form 941X: Quarterly Federal Payroll Tax Return along with your taxes this year.
You’ll need to file the form for the quarters during which your company was considered an eligible employer under ERC. If you’re claiming the credit for wages paid in 2020, then you can claim it for all four quarters. The October 1 deadline only applies to wages paid in 2021.
6. Only Certain Wages Qualify
To understand which wages qualify for the ERC, you’ll need to determine if your business is technically a large one or a small one. This is based on the number of full-time employees you had on your payroll in 2019.
The IRS will use this number to determine which wages are available to apply to the ERC. Note that the 2019 full-time staffing numbers apply to both your 2020 and 2021 tax credits.
To claim the 2020 tax credit as a small employer, you must have had no more than 100 full-time employees in 2019. To claim the 2021 credit as a small employer, you must have had no more than 500 full-time employees in 2019.
What’s the benefit of qualifying as a small employer? These businesses receive special benefits under the ERC program. This includes the ability to apply the ERC credit to all the wages that you paid to employees during your eligibility period.
If you’re considered a large employer, you can only apply the credit to wages that you paid to employees who are unable to perform services due to pandemic restrictions.
7. It Can Extend to Part-Time Employees
With the information presented, you might think the ERC only applies to full-time employees. However, you can include wages paid to both full-time and part-time employees on your form.
Yet, there is a calculation restriction that you need to know. You may only apply the credits to the first $10,000 paid to each employee during each eligibility period (per quarter). This includes both wages and any associated health insurance benefits.
8. You Can Modify the Gross Receipts Test
Your small business was affected by the pandemic and you want to claim the ERC credit. However, you don’t pass the Gross Receipt Test by comparing one quarter to the same time period of the year prior. In other words, you actually made more money in Q1 of 2021 than Q1 of 2020.
In that case, you can choose to reference the immediately preceding calendar quarter instead. Using the example above, that would mean comparing your Q1 2020 gross receipts to those you earned in Q4 of 2020. As long as they meet the “significant decline” standard, you can proceed.
It’s also important to note that you can still claim the ERC even if your company didn’t exist in 2019. In this case, you’ll just need to compare your quarterly gross receipts from 2021 to the same quarters in 2020 to determine if you meet the Gross Receipts eligibility standard.
9. The 2021 Credit Extends Business Types
The 2021 ERC credit extended the list of companies that could claim the benefit on their taxes. Now, you can also apply for this credit if your business falls into one of the following categories:
- Public colleges
- Universities
- Organizations that provide medical care
- Organizations that provide hospital care
- Some organizations that Congress specially charters
A tax professional can advise you on whether your specific business type qualifies. Still, it’s helpful to know that the list is longer than it was, which opens the door for companies who may not have qualified back in 2020.
10. You Can Get the ERC and PPP
Did your business receive a loan in 2020 under the U.S. Government’s Paycheck Protection Program (PPP)? If so, you can still claim the ERC credit for qualifying wages that were not counted as payroll costs under the PPP.
While PPP funds only apply to eight to 10 weeks of your organization’s wage expenses, ERC timelines are longer. In addition, you can use PPP loans to fund non-wage expenses, which you can’t do with the ERC credit.
When filing for the ERC, it’s helpful to collect work documents that reveal your PPP funding was applied across the entire 24-week covered period. This is the 168-day period that begins on the date your PPP load is disbursed.
You’ll only be able to allocate PPP funding to company wages that wouldn’t qualify for ERC. This includes wages paid to the owners of your company or any wages paid in excess of $10,000 per covered employee during one of the four credit-generating periods.
Keep in mind that the IRS doesn’t require business owners to file for PPP forgiveness before filing for the ERC. However, you can strengthen your credit case by allocating the maximum available, allowable costs (non-wage) to the PPP being forgiven.
Does Your Business Qualify For the Employee Retention Tax Credit?
It’s important to get every detail right when filing your corporate taxes. There are many different fields to complete and forms to fill out, and you should maximize every credit you qualify to receive.
This includes the Employee Retention Tax Credit. If you think that you qualify to receive ERC based on wages you paid your employees in 2020 or 2021, talk to a qualified tax advisor. They can analyze your records to determine eligibility and advise you on your next steps forward.
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