Master Employee Retention Credit (ERC) with 9 Key Insights
Many business owners are unaware of the Employee Retention Credit (ERC) or unsure if they qualify, missing out on substantial financial relief. Despite the credit’s potential to cover up to $28,000 per employee in 2021, confusion around eligibility, application, and interacting with PPP loans leaves many businesses hesitant to apply.
This lack of clarity can result in businesses leaving money on the table, struggling with payroll costs, or even facing penalties for incorrect filings. Without claiming the ERC, companies risk not getting the full support they deserve, especially when recovering from pandemic-related setbacks.
By understanding the eligibility requirements, applying through Form 941-X, and ensuring proper wage reporting, businesses can claim the ERC and receive much-needed financial relief. With expert guidance or the right resources, companies can navigate the complexities and secure the credit they’re entitled to. This blog will outline nine key considerations and frequently asked questions when it comes to the Employee Retention Credit.
Key Takeaways:
- What is ERC? A refundable tax credit to help businesses retain employees during COVID-19.
- Eligibility: Available to businesses with under 500 employees that faced operational disruptions or revenue decline.
- Credit Value: Up to $5,000 per employee in 2020, and $7,000 per employee per quarter in 2021.
- How to Claim: File IRS Form 941-X for retroactive claims.
- PPP and ERC: Businesses with a PPP loan can claim ERC but cannot use the same wages for both.
- Avoid Mistakes: Ensure correct wage reporting and eligibility to avoid delays.
1. What is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a refundable tax credit provided by the IRS to encourage businesses to keep employees on their payroll during the COVID-19 pandemic. The credit was established under the CARES Act in 2020 and has been extended and modified by subsequent legislation.
For official guidance and updates on the ERC, visit the IRS Employee Retention Credit page.
2. Who is eligible for the Employee Retention Credit?
Eligibility for the ERC varies depending on several factors, including the size of your business and the impact of the pandemic on your operations. Here are the key criteria:
- Businesses with fewer than 500 employees: Initially, the ERC was available to employers with fewer than 100 employees, but this threshold was increased to 500 employees in 2021.
- Full or partial suspension of business operations: Your business must have experienced a full or partial suspension due to government orders related to COVID-19. This includes state or local government orders to shut down, limit hours of operation, or impose restrictions that hinder business activities.
- Significant decline in gross receipts: If your business experienced a decline in gross receipts, typically 50% or more in 2020 compared to the same quarter in 2019, or 20% or more in 2021 compared to the same quarter in 2019, you may qualify for the credit.
- Nonprofit organizations, including religious organizations: Nonprofits that meet the criteria above may also be eligible.
For more details on eligibility, check the IRS ERC Eligibility FAQ.
3. What wages qualify for the ERC?
Wages eligible for the Employee Retention Credit (ERC) include compensation paid to employees during the period of business suspension or significant revenue decline. Qualifying wages include:
- Salaries and hourly wages: Compensation paid to employees during the eligible period of suspension or decline in revenue.
- Health benefits: Employers can include the cost of health benefits provided to employees, even if the employee is not working during the suspension period.
- Severance payments: Severance pay generally does not qualify unless it is considered part of regular wages or paid in lieu of wages. Severance is only included under specific circumstances.
There are specific rules regarding how wages are calculated for the ERC:
- In 2020, the maximum credit was 50% of up to $10,000 in qualified wages per employee for the year, meaning the maximum credit per employee for 2020 was $5,000.
- In 2021, the credit was increased to 70% of up to $10,000 in qualified wages per employee, per quarter, resulting in a maximum credit of $7,000 per employee per quarter (up to $28,000 per employee for the year if the business qualifies for all four quarters).
4. How much is the Employee Retention Credit worth?
The value of the Employee Retention Credit (ERC) depends on the year and the wages paid to employees. Here’s how the calculation breaks down:
- 2020: For 2020, employers could claim 50% of the first $10,000 in qualified wages per employee for the entire year (not per quarter). The maximum credit per employee for the year was $5,000 (50% of $10,000).
- 2021: For 2021, the credit increased to 70% of the first $10,000 in qualified wages per employee per quarter. This means employers could claim up to $7,000 per employee, per quarter, or a total of $28,000 per employee for the entire year (if eligible for all four quarters).
For more details on how the ERC is calculated, visit the IRS Employee Retention Credit page.
5. Can I still apply for the ERC?
Yes, you can still apply for the ERC, even if you missed the initial deadlines. The ERC is a refundable credit, meaning that if you qualify, the IRS will issue a refund for the amount of credit you’re entitled to, even if you’ve already filed your taxes for the year. You can claim the ERC retroactively for past quarters by filing an amended payroll tax return (Form 941-X).
The IRS allows businesses to claim the credit for the past quarters through Form 941-X.
6. Can I get the ERC if I received a Paycheck Protection Program (PPP) loan?
Yes, initially, businesses that received a Paycheck Protection Program (PPP) loan were not eligible for the ERC. However, this rule changed in December 2020, and businesses that received a PPP loan can now claim the ERC, as long as the wages used for the ERC are not the same wages used for PPP loan forgiveness.
You must carefully allocate the wages between the two programs to ensure compliance. It’s a good idea to consult with a tax professional or accountant to make sure you’re following the rules properly.
For more details on PPP and ERC eligibility, check the U.S. Treasury Department’s PPP and ERC Guidelines.
7. How do I apply for the Employee Retention Credit?
To apply for the ERC, businesses typically file IRS Form 941, Employer’s Quarterly Federal Tax Return, which reports your payroll taxes. You will need to include information about the wages paid to employees and calculate the amount of the credit you’re eligible for.
- For 2020, Form 941 can be filed quarterly, and you can claim the credit on your tax return for the quarters in which you were eligible.
- If you’re claiming the ERC retroactively, you will need to file Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to amend your previous returns and receive the refund.
The IRS has a detailed guide for filing Form 941-X.
8. What are the common mistakes to avoid when claiming the ERC?
There are several common mistakes that businesses make when applying for the ERC, which could lead to delays or denial of the credit. These include:
- Overstating the number of eligible employees: Only employees who are actually retained and on the payroll during the applicable period qualify.
- Incorrectly calculating gross receipts: Ensure you have an accurate record of your revenue decline, as this is one of the primary eligibility criteria.
- Using PPP wages for the ERC: As mentioned earlier, businesses cannot use the same wages for both the ERC and PPP loan forgiveness.
- Missing deadlines for retroactive claims: If you’re claiming the ERC for past periods, you must file amended returns promptly to avoid missing the opportunity for a refund.
9. Do I need professional help to claim the ERC?
While it’s possible to file for the ERC on your own, it is highly recommended that you consult with a tax professional, especially if you’re claiming the credit retroactively or have received a PPP loan. The rules for the ERC can be complex, and an accountant or tax advisor can ensure you maximize your credit while remaining compliant with IRS regulations.
The IRS website also offers additional insights on how to claim the credit and ensure compliance.
Need tax guidance and have a child at home? Explore our ultimate guide to Understanding the Child Tax Credit and maximize your benefits.
Unlocking the real value
The Employee Retention Credit (ERC) is a valuable tool for businesses to offset payroll expenses during challenging economic times, particularly during the COVID-19 pandemic. If your business has been impacted by the pandemic, it’s worth taking the time to explore whether you qualify for this credit. By understanding the rules, keeping accurate records, and filing the appropriate paperwork, you can access financial relief that may be crucial to your business’s recovery and growth.
If you’re unsure about your eligibility or how to apply for the ERC, consulting a tax professional can help ensure you claim the full benefit to which you’re entitled.
FAQs on Employee Retention Credit (ERC)
Can I claim the Employee Retention Credit for employees who were not actively working?
Yes, you can claim the ERC for employees who were not working due to furloughs, as long as they were retained on the payroll and paid qualified wages during the eligible period. Health benefits provided to furloughed employees also qualify.
Are startups or new businesses eligible for the ERC?
Yes, if your business was established after February 15, 2020, and it experienced a decline in gross receipts or was fully or partially suspended due to COVID-19 restrictions, you may be eligible for the ERC. This includes businesses that were not in operation prior to the pandemic.
Can my business claim both the ERC and other pandemic-related tax credits?
Yes, you can claim the ERC alongside other pandemic-related tax credits, such as the Paid Sick Leave and Paid Family Leave credits, as long as the same wages are not being used for both credits. You must ensure proper wage allocation to avoid double-dipping.
