When the COVID-19 pandemic began, Congress passed different programs to provide financial assistance to companies that were forced to shut down their operations. The Employee Retention Credit (ERC) was one of the most beneficial relief provisions introduced, providing eligible employers with refundable credits for wages paid to employees during specific periods of 2020 and 2021.
However, Congress’s swift action and subsequent legislative changes made it more difficult for employers to comprehend the ERC and whether they qualify. Additionally, the ERC is often overlooked. When it first passed, businesses that received Paycheck Protection Program (PPP) loans were not allowed to claim the ERC. With the passage of the Consolidated Appropriations Act in December 2020, this restriction was retroactively removed, thus opening the way for employers to apply for the ERC even though they had applied for or received PPP loans. Businesses claiming the ERC must reconcile wages included in their ERC calculation with wages including in their PPP loan forgiveness.
While the ERC was initially set to expire on January 1, 2021, subsequent legislation extended the ERC through calendar Q3 of 2021. Even though the ERC periods ended in 2021, businesses still have opportunities to claim the ERC retroactively for prior qualifying quarters. Considering that many employers are still recovering from pandemic-related hardships due to government mandated restrictions on commerce, receiving relief through the ERC is a needed boon to many businesses. Eligible employers can claim the credit for their 2020 or 2021 taxes by amending their payroll tax returns, but to take advantage of this valuable tax credit incentive, it is important to fully understand how the program works, who is eligible, and how to claim the ERC correctly.
What Is the ERC and Who Qualifies?
The purpose of the ERC was to encourage employers to keep their employees on payroll during the pandemic and government ordered restrictions. The ERC relief provisions were originally enacted on March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Congress later revised the ERC rules through the enactment of:
- The Taxpayer Certainty and Disaster Relief Act of 2020;
- The American Rescue Plan Act of 2021; and
- The Infrastructure Investment and Jobs Act.
To help employers understand ERC and its opportunities, the IRS issued guidance through FAQs and various Notices, along with these legislative updates.
To qualify for the credit, businesses or nonprofit organizations must meet at least one of the following requirements in the calendar quarter for which any credit is claimed:
- The business or nonprofit organization was fully or partially closed due to a government order stemming from the COVID-19 pandemic; or
- The business or nonprofit organization had a significant decline in gross receipts.
The definition of a significant decline in gross receipts was different for quarters in 2020 than for the quarters in the 2021 calendar year.
For 2020, businesses qualify if they
- experienced a full or partial government-ordered shutdown OR
- a 50 percent or more decline in gross receipts within a given quarter starting on March 12, 2020, through December 31, 2020, compared to the same quarter in 2019.
The credit for 2020 calculated at 50 percent of qualified wages with a $10,000 maximum per employee. This results in a maximum credit of $5,000 per employee for the calendar year 2020.
For 2021, the full or partial government-ordered suspension requirement remains unchanged. However, the gross receipts decline threshold was reduced from 50 percent to 20 percent within a given quarter as compared to the same quarter in 2019. The qualifying time periods are January 1, 2021, through September 30, 2021. Instead of calculating the credit at 50 percent of qualified wages, subsequent legislation increased the credit value to 70 percent of qualified wages, and the $10,000 maximum per employee is considered for each quarter rather than yearly. Thus, for 2021, the maximum credit is $7,000 per quarter for the first three quarters of calendar year 2021. Employers must determine eligibility for each quarter separately.
The statute of limitations on filing amended payroll forms is three years. If a company qualified in 2020 or any of the first three quarters of 2021, the cash refund associated with this credit can still be claimed. Also, new businesses not in existence during a particular quarter in 2019 are permitted to substitute the corresponding quarter of 2020 for the comparison.
How to Claim the ERC?
Employers looking for more information on how to claim the ERC should note that it is a two-part credit. The non-refundable portion of the ERC reduces the employer’s portion of Social Security or Medicare tax, and the refundable portion of the credit allows for a direct refund to the business.
Even though the ERC eligibility periods ended in Q3 of 2021, businesses can file for a retroactive ERC refund by filing Form 941-X. This form can be used to adjust employment taxes filed within three years of the original return or two years from the date the employer paid the tax. Therefore, eligible companies can retroactively file an amended Form 941-X to claim the credit through April 15, 2024 for the 2020 quarters and April 15, 2025 for the 2021 quarters. However, employers should keep in mind that this retroactive refund is only available for the 2020 tax year and the first three quarters of the 2021 tax year. The credit is not applicable prior to 2020 or quarter four of 2021 and beyond.
ERC as a Valuable Business Benefit
Long-lasting financial effects of the pandemic are still challenging for many businesses. The ERC can provide substantial dollars based on the number of employees and quarters for which an employer is eligible. However, there are nuances to this program, so every employer should carefully assess their eligibility before claiming the ERC. Qualifying employers can file an amended Form 941 for prior quarters, utilize the program, and recover tax refunds to help sustain and grow their business as they continue recovery.
The rules around the ERC have evolved, making it difficult for employers to determine eligibility and wages that qualify, especially if they own multiple businesses. Filing the IRS forms incorrectly can delay the entire process. For this reason, organizations may realize numerous benefits by outsourcing their tax credit management to a trusted provider. This option can provide expert support throughout every step of the process, from determining eligibility to submitting the necessary documentation to the IRS and receiving critical audit support if necessary.