The COVID-19 pandemic has presented numerous challenges for businesses and organizations across various industries. In response, the government introduced several relief programs to help support struggling businesses and their employees. One such program is the Employee Retention Credit (ERC), a refundable tax credit designed to incentivize employers to retain their workforce during these uncertain times.
To qualify for the ERC, businesses must meet specific eligibility criteria and have paid qualified wages to some or all of their employees during specific eligible periods. The credit amount varies depending on when the business impacts occurred, with certain limitations applying.
However, while the ERC can be a valuable tool for businesses seeking financial assistance, it’s essential to beware of aggressive marketing tactics and scam promotions that could put you at risk of identity theft or improperly claimed credit. This article will provide an overview of the qualifications for employee retention credit and offer tips on claiming the credit or correcting your tax return if necessary.
Eligibility Criteria
If you want to claim the Employee Retention Credit, it’s important to understand the eligibility criteria, which vary depending on when your business was impacted by COVID-19.
Generally, businesses and tax-exempt organizations that qualify are those that were shut down by a government order due to the pandemic during 2020 or the first three calendar quarters of 2021. They may also be eligible if they experienced the required decline in gross receipts during these periods or qualified as a recovery startup business for the third or fourth quarters of 2021.
To claim the credit, eligible employers must have paid qualified wages during these periods. The credit amount varies depending on when the wages were paid and ranges from 50% to 70% of up to $10,000 in qualified wages per employee per quarter.
Importantly, employers cannot claim the ERC on wages that were reported as payroll costs for Paycheck Protection Program loan forgiveness. Additionally, qualified wages for purposes of the ERC do not include payroll costs in connection with shuttered venue operators grants or restaurant revitalization grants.
Eligible businesses that didn’t claim the credit when they filed their original employment tax return can still claim it by filing adjusted employment tax returns. Quarterly filers can file Form 941-X to claim prior-year credits while annual filers should use Form 944-X.
However, businesses should keep in mind that certain limitations apply to this credit and penalty relief related to claims is available only under specific conditions. It’s always recommended to seek professional help from ERTC Tax Experts before claiming any tax credit or benefit as it requires careful review and knowledge about different eligibility criteria and rules applicable at different times.
Credit Amount
The amount of the ERC varies depending on when a business was impacted by the COVID-19 pandemic. Here are three key factors that determine the credit amount:
- For businesses affected in 2020: The maximum credit is $5,000 per employee for the entire year. Qualified wages paid between March 13 and December 31, 2020 are eligible for a credit equal to 50% of those wages, up to $10,000 per employee.
- For businesses affected in Q1-Q3 of 2021: The maximum credit is $7,000 per employee per quarter. Qualified wages paid between January 1 and September 30, 2021 are eligible for a credit equal to 70% of those wages, up to $10,000 per employee per quarter.
- For recovery startup businesses in Q3-Q4 of 2021: The maximum credit is $50,000 total per quarter. The calculation is more complex than for other periods but generally allows a recovery startup business (defined as starting after February 15, 2020 with gross receipts under $1 million) to claim up to $50k in ERCs against their payroll tax liability.
It’s worth noting that any PPP loan forgiveness amounts cannot be included in qualified wages used for ERC calculations. Additionally, if an employer received funds from either the Shuttered Venue Operator Grants or Restaurant Revitalization Fund programs they cannot use those same amounts towards their ERC calculations either.
As always with tax credits and deductions, consult your tax professional!
Qualified Wages
You’ll need to know which wages count as qualified in order to claim the ERC. Qualified wages are those paid by an eligible employer during the eligibility period and meet certain criteria set by the IRS. The amount of qualified wages that can be used for calculating the credit varies depending on when the business impacts occurred.
For businesses that experienced a full or partial suspension due to a government order, only wages paid during the period of suspension qualify for ERC purposes. For businesses that did not experience a suspension but had a decline in gross receipts, qualified wages include all employee compensation paid during the eligibility period, regardless of whether or not employees provided services.
The definition of qualified wages also depends on employer size. For employers with 500 or fewer full-time employees, all employee compensation qualifies as long as it does not exceed $10,000 per employee per calendar quarter. For employers with more than 500 full-time employees, only wages paid to employees who were not providing services qualify for ERC purposes.
It’s important to carefully review these rules before claiming the credit as they can be complex and specific to each individual situation.
Eligible Periods
During the eligibility periods, your business may have been shut down by a government order due to the COVID-19 pandemic or experienced a decline in gross receipts.
These eligible periods are different depending on whether you’re claiming the credit for 2020 or 2021.
For 2020, the eligible period is from March 12 to December 31, while for 2021, there are four eligible quarters: Q1 (January 1 – March 31), Q2 (April 1 – June 30), Q3 (July 1 – September 30), and Q4 (October 1 – December 31).
To qualify for the Employee Retention Credit during these periods, your business must have been either fully or partially suspended due to a government order related to COVID-19 or experienced a significant decline in gross receipts compared to the same calendar quarter in the prior year.
A significant decline means that your gross receipts were less than 50% of what they were in the same quarter of the previous year.
If you meet these requirements during any of the eligible periods, you can claim this refundable tax credit as long as you paid qualified wages during that time period.
It’s important to note that if you already received a Paycheck Protection Program loan, you can’t use those wages towards qualifying for ERC.
Additionally, payroll costs associated with shuttered venue operator grants or restaurant revitalization grants don’t qualify as qualified wages for purposes of ERC.
Claiming the Credit
To receive a refundable tax credit for eligible wages paid during specific periods impacted by COVID-19, businesses and tax-exempt organizations must carefully review the requirements and claim the credit on their federal employment tax return.
Eligible employers can claim the Employee Retention Credit (ERC) on an original or adjusted employment tax return for a period within those dates. Those who file quarterly employment tax returns can file Form 941-X, Adjusted Employers Quarterly Federal Tax Return or Claim for Refund, to claim the credit for prior 2020 and 2021 quarters.
It’s important to note that certain limitations apply to the ERC. For instance, employers cannot claim the ERC on wages reported as payroll costs for Paycheck Protection Program loan forgiveness. Additionally, qualified wages for purposes of ERC do not include payroll costs in connection with shuttered venue operators grants or restaurant revitalization grants.
It’s crucial to fully understand these limitations before claiming the credit. Penalty relief related to claims for the Employee Retention Credit is available. However, it’s essential to be cautious of aggressive marketing tactics from companies falsely advertising eligibility or offering large upfront fees.
The only way to legitimately claim the ERC is through filing a federal employment tax return and ensuring all eligibility requirements have been met.
Limitations and Exceptions
Be aware of the limitations and exceptions to claiming the ERC, as certain payroll costs may not be eligible for the credit. For instance, employers can’t claim the ERC on wages reported as payroll costs for Paycheck Protection Program loan forgiveness.
Additionally, qualified wages for purposes of the ERC do not include payroll costs in connection with shuttered venue operators grants or restaurant revitalization grants. It’s crucial to carefully review eligible expenses before claiming the credit.
Another limitation to consider is that there are certain caps on how much credit can be claimed per employee per quarter. The maximum amount of credit an employer can claim per employee is $5,000 for all quarters combined.
Businesses receiving a grant under the Restaurant Revitalization Fund program are limited to a $10,000 total tax credit. Eligibility requirements vary depending on when the business impacts occurred and other factors such as gross receipts decline during eligibility periods.
Furthermore, businesses should also beware of potential scams or false claims by promoters about their eligibility for the Employee Retention Credit. It’s best to consult with a reputable ERTC Tax Expert and carefully review all guidelines and regulations before applying for this complex tax credit.
Beware of Scams
Watch out for ERC scams and false claims – you could end up owing substantial interest and penalties if you improperly receive the credit. Scammers may use aggressive marketing tactics, including unsolicited ads, calls, emails, or texts from someone you don’t know.
They may also make false statements about your eligibility for the credit before discussing your tax situation. Be wary of promoters who charge large upfront fees to claim the credit or fees based on a percentage of the refund amount of Employee Retention Credit claimed.
Some promoters may even encourage you to submit your claim quickly by falsely claiming there is nothing to lose. Remember that the only legitimate way to claim the ERC is on a federal employment tax return.
To avoid becoming a victim of an ERC scam, it’s important to carefully review any communications related to this credit. Don’t trust anyone who promises that they can determine your ERC eligibility within minutes without reviewing your specific circumstances.
If you’re unsure about whether you qualify for the credit or need help claiming it correctly, consider working with a reputable ERTC Tax Expert who can provide guidance and support throughout the process.
Conclusion
In conclusion, the Employee Retention Credit (ERC) is a valuable resource for eligible businesses and tax-exempt organizations that paid qualified wages to employees during the COVID-19 pandemic. The eligibility criteria, credit amount, qualified wages, and eligible periods vary depending on when the business impacts occurred, but careful attention to these details can result in significant savings.
However, it’s important to be wary of aggressive ERC marketing and scam promotions that could put you at risk of identity theft or improperly claimed credit. Claiming the ERC requires accurate record-keeping and understanding of limitations and exceptions. With the right guidance and attention to detail, businesses can take advantage of this credit while avoiding potential pitfalls.
Check out our post IRS Halts ERTC Processing until December 31st 2023 for further information on how the ERTC processing is going at the IRS.
