The Employee Retention Credit

The Employee Retention Tax Credit is a government tax credit created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The Employee Retention Credit allows small and medium business owners to receive a tax break for employees they were able to keep on staff during the Coronavirus pandemic.

More specifically, employers eligible for the Employee Retention Credit can receive up to 50% of wages paid to their employees between the dates of March 13th 2020 and December 31st 2020 with a limit of $10,000 per employee.

The ERC was extended by the Relief Act of 2021 to 70% of an employee’s wages per calendar quarter per employee from January 1st 2021 until October 1st 2021, with a limit of $10,000 per employee per quarter.

Many industries can qualify for ERC—the most important thing is that your company meets the qualifications listed above, not that they are in the proper industry or sector.

Some industries that qualify for ERC include education, government contractors, healthcare, life science, hospitality, retail, non-profit, industrial, real estate, construction, technology, and more.

Self-employed individuals do not qualify for ERC. However, industries, where employees were retained due to their ability to work from home, are eligible.

For 2021 wages, the Employee Retention Credit can pay you 70% of a single employee’s wages with a quarterly cap of $10,000. For a simple retention credit example, let’s say you have ten employees who make exactly $10,000 a quarter. That means you’d get $7,000 per employee per quarter for a total of $70,000 across all your employees per quarter and $280,000 for the entire year.

For 2020 wages, the Employee Retention Credit can pay you 70% of a single employee’s wages with a yearly cap of $10,000. For the same company of ten employees, you’d make $5,000 per employee for a total of $50,000.

The program began on March 13th, 2020 and continues to September 30th, 2021 for eligible employers.
You can apply for refunds for 2020 and 2021 after December 31st of this year, into 2022 and 2023. And potentially beyond then too.

We have clients who received refunds only, and others that, in addition to refunds, also qualified to continue receiving ERC in every payroll they process through September 30, 2021, at about 30% of their payroll cost.

We have clients who have received refunds from $100,000 to $6 million.

To qualify for the Employee Retention Credit, your business must fall into one of the following categories:

A disruption in business operations beginning after February 15, 2020 and continued due to the coronavirus pandemic. This includes businesses that are fully or partially suspended by government orders or are unable to operate at normal capacity due to the pandemic.

or

A revenue decline. Your eligibility is largely based on your 2019 records. First, your business must have 500 or fewer employees in 2019 to qualify. Also, your company’s quarterly gross receipts in 2020 and 2021 must be at least 20% lower than the corresponding quarter in 2019. This is to prove your company was financially impacted by the Coronavirus lockdown.

On top of that, you must be a private sector or tax-exempt company that dealt with a partial or full shutdown of operations due to COVID-19.

You do not need a revenue decline to qualify, in fact, many businesses had a revenue increase and still qualified that experienced a disruption in business operations.

The Employee Retention Credit is still available to be claimed, as long as you retained employees and are fully qualified. However, since the window of the ERC ended, the credit can only be claimed retroactively. To receive the ERC, you’ll need to fill out Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return, which allows you to retroactively claim the ERC. This applies to businesses that received PPP (Paycheck Protection Program) loans and those that did not.

You have a three-year deadline from the date of the original filing for which you’re hoping to get a retroactive refund.

Unfortunately, it does not seem likely that the employee retention credit will be extended. The ERC was already extended twice, once by the Relief Act of 2021 and again by the American Rescue Plan Act of 2021

With the passing of the Infrastructure Investment and Jobs Act (IIJA) in November of 2021, the ERC retroactively ended on October 1st of 2021. While you can still claim the tax credit you’re eligible for from January 1st 2020 through October 1st 2021, it is unlikely there’ll be future financial quarters where the ERC is offered.

The employee retention credit was meant to last until January 1st 2022, but ended early with the signing of the Infrastructure Investment and Jobs Act of November 15th, 2021. Due to this, the ERC period ended retroactively at the start of October of 2021 for all businesses except recovery startup businesses.

While the period covered by the ERC is over, it is not too late to retroactively receive your tax credit. You have three years after your initial tax filing to fill out Form 941-X. So, for those trying to claim their 2020 ERC, which they likely would have filed in early 2021 as part of their 2020 taxes, they have until the same date in 2024.

The PPP and ERC have the same goal—to support and help businesses that kept their employees during the Covid-19 shutdown. However, they go about it in different ways, with the money received at very different times.

The PPP stands for the Paycheck Protection Program. It is a Small Business Association-backed loan that helped workforces maintain their employees during the economic downturn of the Covid-19 shutdown. The PPP offers first loans, second loans and the potential for loan forgiveness.

These PPP loans are issued by private lenders or credit unions, although the backing of the SBA means, that as long as the loans are used correctly, the entire loan payment can be forgiven.

The ERC is a tax credit. This means it is not a loan and does not have to be paid back. Instead, a tax credit reduces your final tax bill, saving you money (or possibly making you money back with your tax refund) when tax season rolls around.

Yes. Under the Consolidated Appropriations Act, businesses can now qualify for the ERC even if they already received a PPP loan. Note, though, that the ERC will only apply to wages not used for the PPP.

Yes, you can qualify for the Employee Retention Program (ERC) even if you’ve already received a Small Business Interruption Loan under the Paycheck Protection Program (PPP). It is also possible to only benefit from one or the other, and not receiving a PPP loan will not impact your ability to receive the ERC tax credit. SnackNation even outlines the differences in their guide to ERC vs PPP.

However, the credits from the Employee Retention Program can only be used on wages that were not forgiven by the PPP—if the PPP already covered it, they are not eligible for the tax credit.

Your business qualifies for the ERC, if it falls under one of the following:
-A government authority required partial or full shutdown of your business during 2020 or 2021. This includes your operations being limited by commerce, inability to travel or restrictions of group meetings.

-Gross receipt reduction criteria is different for 2020 and 2021, but is measured against the current quarter as compared to 2019 pre-COVID amounts.

Yes. To qualify, your business must meet either one of the following criteria:
– Experienced a decline in gross receipts by 20%, or
– Had to change business operations due to government orders

Many items are considered as changes in business operations, including shifts in job roles and the purchase of extra protective equipment.

Is the employee retention credit 50% or 70% of qualified wages?

The answer is, confusingly, both. It all depends on which year you’re trying to receive the Employee Retention Credit. The ERC was started in the CARES Act of March 2020. This gave employers 50% of employee wages for the year, with a cap of $10,000 in wages.

However, the ERC was expanded by the Relief Act of 2021 and expanded again by the American Rescue Plan Act of 2021. This expansion not only extended the availability of ERC, but also added to it. For 2021 wages, business owners could claim 70% of wages per quarter with a cap of $10,000 per employee.

So, the credit is 50% of yearly wages per employee for 2020 and 70% of quarterly wages per employee for 2021.

The ERC is not taxable income. You won’t need to pay any of your tax credit back once it is received, assuming you follow all the rules and regulations.

However, the ERC will impact your income tax return. Any employer tax credits will result in a reduction in wages that matches the amount of the credit. The impact of this credit needs to be reflected in the year it was received. So, if the reduction was for 2021, your 2021 tax return must reflect these post-credit wages.

The ERC is not taxable income. You won’t need to pay any of your tax credit back once it is received, assuming you follow all the rules and regulations. 

However, the ERC will impact your income tax return. Any employer tax credits will result in a reduction in wages that matches the amount of the credit. The impact of this credit needs to be reflected in the year it was received. So, if the reduction was for 2021, your 2021 tax return must reflect these post-credit wages.

Since the tax credit can now only be claimed retroactively (since the window for ERC ended after the 3rd quarter of 2021), the only way to claim the credit is with tax Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return. This form amends your former payroll tax return and changes your formerly submitted information to now include the ERC.

The 941-X form is available on the IRS website. The form leads you through the different information you need to provide. Be ready to report all relevant wages and income tax to receive the ERC. The form is long and complex, so be sure to give yourself plenty of time to fill it out and ensure the information is correct to avoid an ERC scam—there’s a lot of money on the line, after all.

According to the IRS, you can expect reimbursement between six and ten months after you filed your 941-X form. However, current filers report that reimbursement can be as soon as ONE month with an average of three to five in 2022.