The Employee Retention Credit is also known as the ERC. It resulted from the Coronavirus Aid, Relief, and Economic Security ACT, or CARES Act. The purpose was to help companies maintain their staffing levels during the 2020 pandemic season.
The tax credit was initially worth 50% of the salaries and wages of qualified employees. However, it was later reduced to just $10,000 for each employee. The minimum credit was $5,000 for any salary or wages paid from March 13, 2020, through December 31, 2021.
The government raised the qualified earnings percentage to 70% for 2021. The maximum wage for every employee went from $10,000 on an annual basis to $10,000 for each quarter.
This credit is an option for any eligible company that pays qualified salaries, wages, and earnings to employees regardless of size. However, companies that have under 500 employees have to meet addiction criteria for 2020 and 2021.
5 Crucial ERC Credit Takeaways You Need To Know:
1. ERC Eligibility: Boost your company's bottom line if you qualify for this tax credit.
2. Credit Qualification: Learn the necessary criteria and steps to ensure your company adheres to the rules and requirements.
3. Not Every Employee Will Be Eligible: Find out which employees are eligible for ERC benefits so you can make the most of them.
4. Adhering to the Requirements: Get familiar with the particular requirements that your company needs to meet to claim credits successfully.
5. Unleash Your Company's Potential: Utilize the ERC to get as much as $26,000 for each employee to grow your refund.
INTRODUCTION ON ERC ELIGIBILITY
Thanks to the passed American Rescue Plan Act, most businesses now have ERC eligibility. This applies to hospitals, colleges, schools, and 501(c)(3) organizations. Eligibility was expanded through the General Appropriations Act to include organizations or establishments that received PPP loans and borrowers previously not eligible for this tax credit.
If a bonus is going to be applied for qualified employers, one of two different conditions must happen for the calendar month in question:
- Trade or economic activity was either brought to a halt or there were reduced operational hours because of a government edict. Credits are only valid for the part of the quarter the company saw closure but not for the entire quarter.
- The gross receipts of the employer dropped substantially.
March 1, 2021, was the IRS Notice 2021-20 issuance date. It detailed how companies could claim the ERC, including businesses who could retroactively claim the credit despite getting PPP loans earlier.
To claim past quarter credits, employers must file Form 941-X titled Modified Employer's Quarterly Federal Tax Return or Request in Rebate. This form must be filed for the appropriate quarters when qualified wages were initially paid. Fortunately, the IRS provides three examples demonstrating how this works.
The ERC is a tax credit to help companies looking to maintain their staffing levels. This credit can be as much as 50% of wages paid, capped at $10,000, for any employer that had a business partially or totally shut down during the pandemic lockdowns or who lost more than half of their gross sales.
This benefit is still available to employers of all sizes, particularly income organizations. Local and state governments or businesses signing out small business loans are the primary alternatives.
Any organization must pass one of two tests to determine eligibility. Each of these tests is applied independently of the other.
Calendar Quarter: In one test, the company's operations were either partially or totally interrupted because of government edicts and pandemic restrictions in the calendar quarter. In the other test, the total revenues were more than 50% lower than an equivalent 2019 quarter. If the business had gross revenues over 80% in a similar 2019 quarter, then eligibility is withdrawn.
WHO QUALIFIES FOR THE EMPLOYEE RETENTION TAX CREDIT?
During 2020, private firms and even tax-exempt organizations that were engaged in business professions might have:
- Partially or halted their operations throughout the entire calendar quarter to comply with pandemic shutdowns, or revenues might have fallen substantially in the specified calendar quarter.
- The qualifying standards were altered for 2021.
- Credit qualification means that more than just a sliver of your business operations would have been stopped.
For ERC benefits to happen, a portion of your business would be considered a negligible sum of process if one of two conditions applies. First, the daily activities of the component would be not less than 10% company's gross receipts. Second, the service time the employees put in would be 10% or more of the overall hours worked throughout the business.
WILL MY BUSINESS QUALIFY?
Generally speaking, your business can qualify if the gross revenue for any fiscal quarter was less than half of what it had in the same quarter for 2019. You wouldn't be eligible if your quarter's overall revenues reached 80% for the fiscal quarter following the same quarter for 2019.
Firms must have been subjected to forced closures designed to minimize pandemic spread or had more than a 20% drop in their overall revenue tallied in the preceding quarter compared to the 2019 prior quarter.
Is your business new? If so, the IRS lets you use the gross revenues from your initial quarter of business as a reference. That's because authorities wouldn't have any 2019 numbers available if you weren't even in business then.
The credit equals half the eligible wages, with a maximum of $10,000. That covers payments made from March 13, 2020, through December 31, 2020. The acceptable pay criteria differ if your business has over 100 employees on average through 2019.
If you had under a hundred, then the credit would be based on the wages and salaries paid to all employees, and that would happen independently of whether the company average was 100 or less for 2019. In short, even if employees find jobs and get paid for their employment, the company still gets credit.
In cases where a company has more than 100 average employees for 2019, the credits only apply to employees' wages who didn't work during the assigned calendar quarters.
In either case, wages include compensation to employees and the costs of and expenses of healthcare coverage. Employers can get compensation and credit immediately through payroll tax reductions taken from employee paychecks before payroll taxes are submitted to the IRS.
DO ALL BUSINESSES HAVE ERTC ELIGIBILITY?
The government is generating billions of dollars of economic stimulus through the ERC, but millions of business owners are leaving this money on the table.
You might have been given inconsistent advice from your tax professionals, bookkeepers, payroll agency, and banks. Don't fall for rumor and gossip, and get your refund!
ERC benefits are available to all restaurants that had to partially suspend their operations during the prior year, as stated by indoor eating occupancy restrictions detailed in lockdown edicts.
Every state has a timeline to let dining establishments reopen, but you can qualify if you can't operate at your full capacity because of social distancing rules or percent restrictions.
WHAT ARE THE ERC REQUIREMENTS MY BUSINESS HAS TO MEET?
After the American Rescue Plan Act was passed, many enterprises were eligible for credits. This included clinics, universities, colleges, and 501(c)(3) nonprofits. When the Annual Finance Act was passed, it expanded the prior eligibility to include companies that had taken out Paycheck Protection Program loans and even debtors who had previously been ineligible for the credits.
Eligible employers who think they have a qualified quarter to apply for benefits must meet one of two different conditions:
- A federal mandate reduced business hours or suspended contract operations temporarily or permanently.
- The credit will only apply to the portion of the quarter when the establishment was closed but not the whole month.
Based on information from the IRS, some firms can't meet the criteria of this test; consequently, they aren't eligible. Some firms were deemed vital, but they might have had disruptions to their supply chains that made it impossible to keep operating at all in the first place.
Some firms were forced to close but could use telework to keep operations going. If their gross earnings dropped substantially, these might pass the second-factor test and be eligible for benefits and loans.
On August 10, 2021, the IRS issued the Revenue Procedure 2012-33 document. It created a safe harbor a business could use to exclude PPP loan forgiveness sums, Restaurant Revitalization Funds, and Forced-to-shut-down Venue Technicians Grants from their gross receipts so they could determine ERTC eligibility. If the safe harbor is used, it must be applied consistently across every organization where employers use it.
MORE INFO ON ERC QUALIFICATIONS
The ERC benefit is a refundable tax credit equal to half the employee earnings that apply to certain employment taxes. The primary goal of this program is to help firms have enough financial resources to pay their professionals.
Employers might be eligible if their operations were partially or totally halted due to pandemic restrictions. Alternatively, they might be eligible if their gross revenues for a certain 2020 quarter were less than half of what they were for a similar 2019 quarter.
The ERC was previously accessible for 2021 with some adjustments due to the ARP Act. This was a crucial addition to the ERC program because it allowed firm owners more opportunities for financial recovery.
One frequent question is whether or not firms can utilize ERC benefits even after getting PPP cash. The current relief legislation lets most firms do just that.
Eligible employers can access a credit that maxes out at $5,000 per 2020 worker, but the credit goes up to $14,000 per 2021 worker.
For example, a $250,000 credit could be $5,000 times 50 total workers in 2020. Then, a $700,000 credit might be $14,000 times the same 50 workers in 2021. Those would be attainable numbers for a qualifying firm with 50 employees that hit the wage ceiling. As you can see, the figures add up fast and lead to a substantial financial benefit you shouldn't overlook.
The first thing separating PPP stimulus from ERC benefits is that a company might employ any total of employees and still be ERC-eligible. This credit isn't restricted to small businesses; instead, it's available to all qualifying firms that conduct commercial operations and meet one of the two criteria:
Company trade or operations were totally or partially halted in a calendar quarter due to pandemic directives restricting group meetings, travel, and commerce.
The employer's gross receipts dropped notably when comparing similar quarters of 2019 and 2020.
The ERC wasn't yet available to agencies and organizations in the original CARES Act.
As of the start of 2021, ERC standards were amended to permit 501(c)(1) nonprofits that had tax-exempt status under section 501(a) to be eligible for ERC benefits. Eligibility was also extended to government firms when they provided hospital services and medical treatment.
Eligible companies must report qualifying earning totals on federal payroll tax returns. These are usually Form 941 as the business quarterly taxation form.
An eligible firm can reduce its federal employment taxes without being penalized for failing to pay based on qualified wages it has already paid out. Even if your business already submitted a Form 941 before the ERC was available, you can still submit an updated or revised Form 941.
Applicable amounts include wages, salaries, employee pay, and specific healthcare plan costs. Employers might also choose to use wages that weren't originally categorized as qualifying wages that were applied to PPP debt forgiveness.
WHICH TYPE OF EMPLOYERS QUALIFY AND WHICH DON'T?
Employers can be designated as “qualified employers” per Internal Revenue Section 52 or 414 due to their specific business structure if they want to qualify for ERC benefits. Also, there are other requirements for the years 2020 and 2021:
For 2020, an employer can establish their qualifications by demonstrating one of these criteria:
Their first-quarter gross receipts in 2020 were under half of what they had for an identical quarter in 2019.
Alternatively, their economic activity was paused due to pandemic lockdowns and restrictions regarding gatherings, deals, and travel.
For 2021, employers can qualify if they show one of these:
Their first-quarter 2021 revenues were under 80% of the levels of an identical quarter in 2020.
Alternatively, their economic activity was paused because of pandemic lockdowns or government restrictions on travel, gatherings, and trade activities.
You should also note that some firms qualify as recovery startups. These are firms only eligible for ERC as of Q4 2021. To qualify under the category of Recovery Startup Business, two conditions must be met:
First, the firm started operations after February 15, 2020.
Second, the firm's gross receipts fall under $1 million.
The starting point is any income used for Social Security taxes to identify qualifying wages. Following that, there are several changes.
The only eligible payments started on March 12, 2020, and ended January 1, 2021.
Other restrictions include credits being available for salaries used for Job Opportunity Credits.
To get ERC benefits, firms employing less than 100 full-time professionals on average throughout 2019 can use the incomes of all of their eligible workers.
Employers are only eligible for credits on qualified wages and salaries earned during periods where operations were halted because of pandemic restrictions or a sharp decline in overall receipts, and the amount involved frequently surpassed what an employee might have earned if the pandemic hadn't happened.
Wide aggregation criteria might be applied to establish whether a firm is a large or small business, and ownership rules greater than 50% might create buddy relationships or parent-subsidiary circumstances. The service group regulations and Internal Revenue Code Section 414 provisions apply here.
ARE ALL MY EMPLOYEES ELIGIBLE?
Earnings, wages, and salaries, including specific healthcare expenses, disbursed in a qualifying quarter when your business activities were reduced or halted will qualify for ERC benefits.
To understand this, you must know what is legally considered a “qualified salary.” As an employer, you can use ERC to recover certain earnings, but the actual definition of qualified earnings is different based on the size of your business and how many employees you had at the time.
If your business averaged more than 100 workers during 2019, then eligible earnings can include certain healthcare expenses and even payments given to employees if their services were eliminated because of your business having financial troubles.
Employers can now get back up to the amount an employee was paid for their work during a similar amount of time for 30 days before the economic insecurity happened during the pandemic.
Given what we know thus far, should you satisfy the following requirements in the qualifying quarter, then you are likely to be eligible for the updated 2021 ERC:
Your business was operational before February 16, 2020. You're either a Severely Distressed Employee or have under 501 W2 employees during the qualifying quarter.
A complete or partial government-mandated shutdown impacted your firm,
You can demonstrate losing more than 20% of your gross receipts in the qualifying quarter.
If you have over 500 employees, you might still qualify for Severely Distressed Employer status if your income loss was 90% or worse.
FINAL THOUGHTS: WHO IS ELIGIBLE FOR ERC CREDIT?
Your business might qualify for ERC benefits based on what happened to your gross income in 2020 or 2021. You might be eligible if it was disrupted or went down compared to 2019. The ERC was created to encourage companies to keep their payroll intact during the pandemic.
More recent adjustments and qualification changes to the ERC have expanded access to more businesses. Explore the ERC options to see if your business can benefit from this IRS incentive. Getting ERC benefits can financially relieve your business of pandemic expenses and costs.
The paperwork might seem intimidating, but the right tax and accounting professionals can help you sail through it. Considering the potential financial relief you can generate for your firm, it's well worth exploring your eligibility and options. Millions of businesses are enjoying unprecedented refunds on payroll taxes they've already paid or reductions in what they owe, thanks to the ERC benefits provided by pandemic legislation. Make sure that your company isn't left out of the economic stimulus that's widely available while it's still possible to harness it.