The Employee Retention Tax Credit (ERC) was a refundable payroll tax credit to incentivize businesses to retain employees during the Covid-19 Pandemic. The Coronavirus Aid, Relief, and Economic Securing Act (CARES) Act established the ERC.
Eligible employers included those that were ordered to shut down by a local government or experienced a reduction in receipts by 50% or more during the corresponding month in 2019. Businesses that were not in operation in 2019 can’t claim the credit.
Under the tax provision, eligible businesses could claim a refund for qualified wages paid during the pandemic. The provision underwent several changes and adjustments since its initial implementation under the CARES Act.
New laws adjusted the tax credit provisions as the pandemic continued into 2021. Here is a brief overview of the Employee Retention Credit timeline.
Under the original provision, employers could claim a maximum credit of $10,000 per employee retained from March 13, 2020, to December 31, 2020.
Under the update to the ERC, employers who received Paycheck Protection Program (PPP) loans were now able to claim the ERC, provided the wages were not treated as payroll costs when obtaining PPP loan forgiveness. The update retroactively applied to wages paid from March 27, 2020, to December 31, 2020.
Effective December 27, 2020, the Consolidated Appropriations Act of 2021 (CAA) extended the ERC to include wages paid before July 1, 2021. It also increased the credit to $7,000 per employee within a quarter.
Effective April 1, 2020, the American Rescue Plan Act of 2021 (ARPA) extended the ERC to cover wages paid between July 1, 2021, and December 31, 2021.
Effective November 15, 2021, the Infrastructure Investment and Jobs Act of 2021 (IIJA) retroactively repealed the ERC as of September 30, 2021. Businesses that planned on receiving the tax refund for wages paid between October 1, 2021, and December 31, 2021, could no longer claim the credit. The sole exception applied to recovery startup businesses, defined by the ARPA and later amended in the IIJA.
The qualifications for an eligible employer depend on the period during which the qualified wages were paid.
To qualify for the tax credit on qualified wages paid between March 13 and December 21, 2020, your business must have carried on trade or have been a tax-exempt organization that:
Businesses applying for the ERC for wages paid between January 1, 2021, and September 30, 2021, must meet the following conditions:
Most businesses do not qualify for the ERC on wages paid during Q4 2021. The sole exception applies to recovery startup businesses. The IIJA amended section 3134 of the Internal Revenue Code to exclude all companies except recovery startups as defined in section 3134(c)(5).
If you reduced employment tax deposits for Q4 2021 wages on or before December 20, 2021, consult with your tax professional to see if you are exempt from the failure to deposit penalty or not.
Many business owners ask us, how does the Employee Retention Credit work? While the Employee Retention Credit is expired, businesses can still retroactively apply for the credit on wages paid during the active period (March 13, 2020-September 30, 2020, for most businesses).
Employers who have yet to claim the credit can file Form 941-X, Adjusted Employer’s Quarterly Tax Return, or Claim for Refund.
For wages paid in 2020, employers can file up until April 15, 2024. For wages paid in the first three quarters of 2021, employers can file until April 15, 2025.
The ERTC is a federal payroll tax credit for 2020 & 2021. However, if your taxes owed are zero, you can receive compensation above your tax liability. If your business has previously filed taxes in 2020 & 2021, you can retroactively claim the ERTC to either reduce tax debt or receive surplus credit where applicable.
If your business has previously filed 2020 and 2021 payroll taxes, you can retroactively claim the ERTC to reduce your tax debt and, where applicable, receive a surplus credit, which can result in a cash refund.
If your business qualifies, you are entitled to up to $26,000 per employee through the ERTC. Through United Capital Source, the process of receiving your compensation is quick and easy.
Absolutely! If you have already filed your taxes for 2020 and/or 2021, the ERTC can be applied through either a credit to your tax bill or a refund of tax money you already paid.
Technically, yes, you can still qualify for the Employee Retention Credit if you also received a PPP loan. Under the original provision in the CARES Act, employers could choose either a PPP loan or the ERC. Amendments to provisions of the CAA and IIJA allowed employers to claim the credit even if they received a PPP loan.
The caveat is that you can’t claim both provisions for the same wages. If you included wages paid as part of the payroll cost for PPP forgiveness, you could not claim those wages for the tax credit.
The Employee Retention Tax Credit expired on September 30, 2021. For a recovery startup business, the tax credit expired on December 31, 2021.
While the ERC is no longer in effect, employers can still claim the credit for wages paid during the active period. Businesses can file Form 941-X up to three years after filing or two years after paying, whichever is later.
Qualifying wages depend on the average number of employees in 2019.
If a business averaged under 100 employees during 2019, it could claim the ERC for all employees, whether they were working or not. Suppose a business averaged over 100 employees in 2019. In that case, it could only claim wages for employees who didn’t work or provide services (i.e., on furlough or some other form of suspension from work duties.)
Businesses that averaged 500 or more employees in 2019 could only claim the ERC for wages paid to employees who didn’t work during the qualifying period. If a business averaged fewer than 500 employees in 2019, it could claim the ERC for all employees, whether working or not.
In 2020, the credit was equal to 50% of up to $10,000 in wages paid per employee for all qualifying quarters between March 13, 2020. A qualifying quarter is anywhere gross receipts fell by 50% or greater during the same calendar quarter in 2019. Total credits could not exceed $10,000 per employee annually.
The IRS applied the credit to the employer portion of the employee’s social security tax, which was fully refundable. The credit served as an overpayment and was refunded after subtracting the employer’s share of those taxes.
The credit equaled 70% of up to $10,000 in qualified wages per quarter in the first three quarters of 2021. Essentially, employers could claim up to $7,000 per employee per quarter, which equals a total of $21,000 per employee annually.
The IRS applied the credit to the employer portion of the employee’s social security tax, which was fully refundable. The credit served as an overpayment and was refunded after subtracting the employer’s share of those taxes.
The first step is determining which wages qualify and which don’t. You can use the qualifications above to see. We’re going to use a simple example to show how it works.
Let’s say you ran a retail store and your gross receipts declined by 80% in Q1 2021 compared to Q1 2019. Your business employs 20 people, so you’re well under the 500-employee threshold.
You can claim 70% of wages up to $10,000 for the quarter. Assuming all 20 employees earned wages equal to or greater than $10,000, you can claim $7,000 per employee, which works out to $140,000 for the quarter. If the pattern held for the first three quarters of 2021, your total tax credit would be $420,000 for the year.
Obviously, the actual amount you will qualify for depends on how much business you did in 2020 and 2021 vs. the same calendar periods in 2019, the average number of employees, and whether or not your received PPP loans and PPP forgiveness. The above example is only meant to illustrate a potential and simplified ERC scenario. Consult with your accountant or payroll professionals when filing for the ERC.
Recovery startup businesses are defined in the American Rescue Plan Act. It refers to any business that opened its doors during the pandemic and meets the following conditions:
If a business began during Q2 of 2021, it could not claim the credit for any portion of 2020 or the first two quarters of 2021. If you acquired an existing company on or after February 15, 2021, you may or may not qualify for the ERC, depending on several factors.
Most eligible businesses will receive the refund within six months to one year of filing. However, you can apply for an ERTC Advance to receive funds within 1-2 weeks.
With over 170 pages of documentation, the ERTC can be complex and confusing to navigate. UCS has created a fast, stress-free process so that businesses can receive the maximum amount available through the ERTC.
