The Employee Retention Credit (ERC) has been a vital lifeline for many businesses struggling to survive during the pandemic. As we move towards a post-pandemic world, it is important to consider the future prospects and developments of the Employee Retention Credit too.
In this article, we will explore what businesses can expect from the ERC in the coming months and years. With vaccination rates increasing and restrictions being lifted, there is hope that economic recovery is on the horizon. However, many businesses are still facing significant challenges as they try to regain their footing in a rapidly changing landscape.
The ERC may continue to play an important role in supporting these businesses as they navigate this uncertain terrain. By understanding the current rules and eligibility criteria for the ERC, as well as keeping an eye out for any changes coming on the horizon, businesses can position themselves to take advantage of this valuable credit and maximize their benefits.
ERC Eligibility in 2020
You may remember that in 2020, the Employee Retention Credit (ERC) was only available for certain employers who met the Gross Receipts Test and Shutdown Test.
Small employers with 100 or less full-time employees in 2019 were able to generate ERC on payroll expenses. On the other hand, large employers with more than 100 employees in 2019 could only claim ERC if they paid their employees not to work.
Calculating ERC involved determining qualifying expenses and considering if they were already claimed for another credit under FFCRA or PPP forgiveness. This created some complications for businesses trying to navigate multiple relief programs at once.
However, as part of the Consolidated Appropriations Act (CAA), eligibility requirements changed, allowing more businesses access to ERC benefits.
Despite these changes, many businesses were still left out of receiving relief due to lack of information or difficulty navigating the application process. The IRS also had a backlog of unprocessed ERC claims, leading to further delays.
Nonetheless, these challenges didn’t deter lawmakers from expanding ERC benefits even further in 2021.
ERC Rules in 2021
Now, as a business owner, you may be interested to know that the 2021 ERC rules have expanded eligibility and increased the credit amount, allowing for up to $7,000 per quarter/per employee. This is great news for many businesses who were struggling due to the pandemic.
The decline in gross receipts causing eligibility has also been reduced to 20%, making it easier for more employers to qualify. Additionally, the definition of small employer has been expanded to include those with 500 or fewer employees in 2019. Recovery Startup Businesses also have separate set of rules that can help them qualify for ERC.
Overall, these changes provide much-needed relief for businesses as they continue to navigate through uncertain times. As a reminder, if you believe you are eligible for ERC but have not yet applied or need to amend your payroll tax returns from previous years, it’s important to do so before the deadline.
The IRS currently has a backlog of unprocessed claims and there is an estimated error rate of over 12% in submitted claims. By taking advantage of these expanded rules and filing correctly and promptly, businesses can secure much-needed financial assistance during this challenging time.
Calculating the ERC
To calculate the ERC, it’s important to consider qualifying expenses and whether they have already been claimed for another credit under FFCRA or PPP forgiveness.
Qualifying expenses include wages, health plan expenses, and certain retirement plan contributions paid to employees. Employers can also claim a portion of qualified group health plan expenses that are allocable to wages.
If an employer has already claimed a credit for qualified sick leave wages or family leave wages under the FFCRA or has received forgiveness of a PPP loan that included payroll costs, those amounts cannot be used towards calculating the ERC.
Additionally, if an employer claims the Work Opportunity Tax Credit (WOTC) for any employee in a calendar quarter, they cannot claim the ERC for that same employee during that quarter.
Calculating the ERC can be complex and employers should consult with their tax professionals to ensure accurate calculations.
It’s important to keep detailed records of all qualifying expenses and credits claimed to avoid errors or audits by the IRS.
By properly calculating and claiming the ERC, employers can receive valuable financial relief during these uncertain times while retaining their valued employees.
Expanded Eligibility in 2021
With the expanded eligibility in 2021, small employers with 500 or less employees in 2019 can now claim up to $7,000 per quarter/per employee as part of the Employee Retention Credit. The credit amount has been increased and the decline in gross receipts causing eligibility is now reduced to 20%. This means that more businesses are eligible for the ERC than before and can receive a higher credit amount.
To qualify for the ERC, employers must determine if they meet one of two tests: Gross Receipts Test or Shutdown Test (Full or Partial). Under both tests, small employers with 100 or fewer full-time employees in 2019 can generate ERC on payroll expenses. However, large employers with more than 100 employees in 2019 can only claim ERC if an employee is paid not to work.
Additionally, Recovery Startup Businesses have separate rules to qualify for the ERC.
In order to calculate their eligibility and credit amount under these new rules, businesses will need to consider their past revenue and number of employees. It’s important for businesses to stay up-to-date on changes and developments surrounding the ERC as it may affect their ability to claim credits.
By taking advantage of this expanded opportunity through proper calculations and documentation, small businesses can potentially receive significant financial relief during these challenging times.
Complete Guide to ERC and ERTC
If you would like to read more about Employee Retention Tax Credit (ERTC) then take a look at the Complete Guide to ERC and ERTC written by Paul Kohn. Paul has done extensive research into ERTC and all the intricacies of the tax credit. Find out if it could benefit your business and maximise your claim.
Backlog and Errors
As you navigate the ERC process, it’s important to be aware of the IRS backlog of unprocessed claims and the GAO report estimating a 12.33% error rate in submitted claims. This means that employers who have submitted ERC claims may experience delays in receiving their credits or may even have their claims denied due to errors.
It’s crucial for employers to carefully review their eligibility and calculations before submitting their claims to avoid any potential issues. To address the backlog and errors, the IRS has implemented measures such as hiring additional staff and streamlining processes. However, employers should still expect some delays in processing times for their ERC claims.
As a proactive measure, employers can review their payroll records and supporting documentation to ensure accuracy and completeness before submitting their claims. Additionally, amended returns can be filed for up to three years after each quarter’s payroll tax return deadline, providing an opportunity for employers to correct any errors or missed opportunities for claiming ERC credits.
Employers can file amended returns for 2020 on or before April 15, 2024, while amended payroll returns for 2021 can be filed on or before April 15, 2025. Being aware of these options can help employers take advantage of all available opportunities for claiming ERC credits while also ensuring compliance with IRS regulations.
Conclusion to Future Prospects And Developments Of The Employee Retention Credit
In conclusion, the Employee Retention Credit (ERC) has been a lifeline for many struggling businesses during the pandemic. The eligibility criteria and rules for ERC have evolved over time, with expanded eligibility and credit amounts in 2021. However, there is still a backlog of unprocessed claims and the possibility of errors in submitted claims.
Looking ahead, it’ll be interesting to see how the ERC develops in the future. Will it be extended beyond 2021? Will there be further expansions or changes to eligibility criteria? Businesses should stay informed on these potential developments. We will post details of future changes so you can keep up-to-date and maximize the benefits from this credit.
Note on 14th September 2023 the IRS halted ERTC processing until the end of 2023 while they investigate fraudulent claims and deal with the backlog.
Overall, the ERC has provided much-needed relief for businesses during challenging times. As we move forward, it’ll be important to continue supporting small businesses through programs like this one.
