The Employee Retention Credit (ERC aka ERTC) is a tax credit designed to incentivize businesses of all sizes to retain their employees during the COVID-19 pandemic. The credit was introduced in the CARES Act and has since been expanded by subsequent legislation, making it more accessible and generous.
However, many businesses are still uncertain about who is eligible for the Employee Retention Credit and how they can claim this valuable credit.
To be eligible for the ERC, a business must meet certain criteria related to government orders or significant drops in gross receipts due to COVID-19. There are also specific rules regarding acceptable pay changes and industries that qualify for ERC benefits. Additionally, PPP loan recipients and recovery startups may be eligible for the ERC under certain circumstances.
This article will explore these eligibility requirements in detail, providing businesses with the guidance they need to determine if they qualify for this critical financial support during these challenging times.
ERC Basics
So, if you’re a business owner wondering about the basics of the Employee Retention Credit (ERC), it’s worth noting that this program was introduced in the CARES Act to incentivize businesses like yours to keep staff during the pandemic.
In 2020, the maximum credit for an employer who qualifies for the ERC is 50% of the first $10,000 in qualified wages or in other words up to $5,000 per employee.
By 2021, however, the percentage of qualified earnings increased to 70%, and the wage maximum also increased to $10,000 per quarter.
The ERC is available to all eligible businesses of any size but has additional conditions for those with fewer than 500 employees. Eligibility is determined by government orders related to COVID-19 or significant drop in gross receipts. Most businesses are now eligible for ERC benefits, including schools, colleges, hospitals and 501(c)(3) organizations. PPP loan recipients are also eligible for ERC.
Use Form 941-X to claim a refund for past quarters. The main criteria include a credit of up to $5,000 wages paid by an employer whose business has been shut down or whose gross sales have reduced by more than 50%.
To qualify as a recovery startup business the business must have started operations after February 15th 2020 and have less than $1 million in gross receipts.
Additionally, there are only retroactive refunds available for tax years 2020 and first three quarters of tax year 2021 under certain circumstances such as ceasing company activities during qualifying quarter(s).
Qualification Criteria
Businesses can claim a tax refund for up to $10,000 of wages paid per employee if they pass one of two tests to qualify for the government’s incentive program. The first test requires businesses to show that their operations were fully or partially suspended due to government orders related to COVID-19.
The second test requires businesses to demonstrate a significant decline in gross receipts, which is defined as a decrease of 20% or more in revenue compared to the same quarter in 2019.
Most types of employers are now eligible for ERC benefits, including schools, colleges, hospitals, and 501(c)(3) organizations. Additionally, PPP loan recipients are also eligible for the credit. To claim the ERC refund for past quarters, businesses must use Form 941-X.
Eligible Industries
Eligible industries include not-for-profit organizations, industrial companies, law firms and attorneys, technology firms, media and telecommunications companies, professional service providers such as accountants or consultants; healthcare facilities such as hospitals or clinics; life sciences companies such as drug manufacturers or medical device makers; government contractors who provide services like construction projects or consulting work; transportation and logistics firms such as trucking companies or shipping providers; hospitality and retail establishments like restaurants or stores selling consumer goods; and real estate developers who build houses/apartments/office buildings/etcetera.
PPP Loan Recipients
If you’ve received a PPP loan (note this program ended on May 31st, 2021), you could still be eligible for financial assistance through the ERC program. The Employee Retention Credit is available to businesses of any size, including those that have received Small Business Loans. You could have your PPP loan fully forgiven if it was spent on qualifying expenses like payroll costs.
Note it is essential not to double-dip. Which means salaries can be allocated to either ERC or PPP foregiveness but not both.
Recovery Startups
For startups that began operations after February 15, 2020 and have gross receipts under $1 million, there’s hope for financial relief through the Recovery Startup program.
This program was put in place to help businesses that weren’t yet operational when the pandemic hit. Eligible companies can claim up to $50,000 per quarter of the Employee Retention Credit (ERC) and receive a refundable payroll tax credit.
To qualify as a recovery startup, the company must have started operations after February 15, 2020, and have gross receipts of less than $1 million.
The credit amount is based on qualified wages paid to employees during each quarter the business qualifies for ERC refunds.
Businesses may claim credits until December 31, 2021.
The ERC/ERTC program offers financial assistance to eligible businesses affected by COVID-19.
Business owners should consider exploring their options regarding this program if they believe they meet the requirements for financial assistance. We would recommend using the services of an ERTC Expert tax professional. They should be experienced in the intricacies of the rules and be able to help you accurately complete the Form 941-X to claim your refund. This should reduce the chances of the IRS coming back later and performing an audit on your company.
Claiming the Credit
Claiming the ERC can provide much-needed financial relief to struggling businesses during these challenging times. To claim the credit, eligible employers must use Form 941-X to file for each quarter in which they qualify for the ERC refund. The IRS refund processing time for amended Form 941X varies and can take many months as there is currently a backlog. We suggest you get your claim in the queue as soon as possible so that you don’t miss the deadline dates or the IRS changes the rules again.
It’s important to note that the deadline for retroactively filing and claiming the Employee Retention Tax Credit is 2024 and 2025 respectively, for tax years 2020 and 2021. Eligible employers can still claim qualified wages until December 2023 for the period and benefit until April 15, 2024.
Conclusion
In conclusion, the Employee Retention Credit (ERC) is a valuable tool for businesses looking to retain their staff during the pandemic. The credit has been increased to 70% of qualified employee salaries, with a maximum wage of $10,000 per quarter.
Eligibility is determined by government orders related to COVID-19 or significant drops in gross receipts. Businesses with fewer than 500 employees have additional conditions for eligibility. It’s important to note that eligible industries include those affected by government shutdowns and social distancing protocols, as well as PPP loan recipients and recovery startups.
To claim the credit, businesses must file IRS Form 941-X and provide documentation for pay changes. We recommend if you are uncertain about completing the process using the services of an ERTC tax expert.
Overall, the ERC offers much-needed financial relief to businesses struggling during these difficult times.
