If your business experienced an interruption or decline in gross revenue during 2020 or 2021 compared to 2019, you may be eligible for the Employee Retention Credit (ERC). The ERC was enacted to incentivize employers to keep employees on their payroll during the pandemic.
Recent ERC qualification and extension changes allow more businesses to take advantage of the credit. Learn more about the ERC and how to determine whether your business qualifies for this IRS benefit.
What is the Employee Retention Credit?
The ERC is a tax credit first instituted by the IRS in March of 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. In its original form, the ERC provided a tax credit against federal payroll taxes. The ERC was equal to 50% of the qualified wages, up to $10,000 per eligible employee, paid in 2020. Employers who claimed the credit reduced employment tax deposits for immediate access or obtained an advance IRS payment for the credit.
At the end of 2020, the Consolidated Appropriations Act, 2021 (CAA21) added modifications to the ERC, and in March of 2021, the American Rescue Plan (ARP) extended the ERC benefits through December of 2021. Further changes were made in November 2021 with the passage of the Infrastructure Investment and Jobs Act or the Bipartisan Infrastructure Bill (BIB).
In its most updated form, the ERC is available to businesses that experienced a decline in business or were forced to shut down temporarily during the pandemic due to government orders relating to COVID-19. If your company qualifies for the ERC, you can take a credit of 70% of the qualifying wages up to $10,000 per quarter. The maximum credit could be up to $7,000 per employee per quarter in 2021 and $5,000 for the whole year in 2020. When excluding the fourth quarter, the maximum benefit for 2021 is $21,000 per employee.
What are the Current ERC Qualifications?
The most up-to-date employee retention credit qualifications remain similar to the original stipulations set forth by the IRS. However, the BIB shortened the eligibility time frame to exclude the fourth quarter of 2021. It also included the addition of special qualifications for employers who are severely financially distressed or part of a recovery startup.
According to the IRS, employers who conducted business in 2020 and 2021 are eligible for the ERC if the organization:
- Experienced a partial or total suspension of business or trade due to government orders related to COVID-19
- Saw a significant decrease in gross receipts – less than 80% of gross receipts for the same calendar quarter in 2019
- Meets the qualified wages based on the number of employees (if over 500 full-time eligible employees in 2019, the credit is limited to wages paid to those not working)
This applies if your business received Paycheck Protection Program (PPP) loans, as long as the ERC wages are not treated as payroll costs to obtain PPP loan forgiveness.
If a business did not exist in 2019, the IRS provides guidance for determining whether COVID-19 regulations impacted your business enough to qualify for the ERC.
How to Claim the ERC
If you qualify to claim the ERC, you must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, or Claim for Refund. Formerly, businesses used Form 7200 for advance payment of the ERC under certain conditions.
You may consider working with a professional business tax firm to discuss your tax planning and filling strategy regarding the ERC and other COVID-19 related issues. The government has changed several ERC forms and requirements, making it challenging to navigate the process without guidance.
How to Determine if Your Business Qualifies
If you plan to claim the ERC for 2021, you must ensure you qualify for the benefit. The best way to determine if you meet the qualifications is to work with a professional tax planning and advisory firm to navigate the complex changes made to the ERC requirements.
Windes, a California-based tax planning firm, offers ERC qualification assistance to help you determine if your company qualifies for the ERC. We will assess your business’ payroll data and gross receipts to see if you meet the newest qualifications set forth by the CAA and BIB.
Windes understands how to cut through the ERC confusion to help you maximize your potential ERC benefits. One significant myth that has prevented companies from filing for the ERC is that they cannot receive it because their business did not fully shut down.
Your business may still qualify even if it did not shut down. If your company reduced hours to accommodate sanitation, reduced the services you offer, or could not access necessary equipment due to COVID-19, you may still qualify for the credit
Many business owners also believe their business cannot receive the ERC if they did not have a 50% drop in revenue or if their business has grown in the past year. Additionally, common ERC myths such as “I cannot claim ERCs because I have more than 500 employees” or “I cannot claim ERCs because my business never shut down” often prevent owners from finding out if they do, in fact, qualify.
Windes tax professionals understand the complexity of the ERC program and all of the many changes enacted by the IRS. If your business qualifies, we will ensure you receive the maximum credit available based on your business’s financial information.
Get ERC Qualification Assistance
Obtaining the ERC can benefit your business and provide relief from COVID-19 related financial hardship. It is essential to take advantage of this government benefit before it ends. Work with Windes. We are a professional accounting and tax planning organization with over nine decades of public accounting experience and can help you determine if your business qualifies for the ERC.