Employee Retention Credit
What is ERC Employee Retention Credit?
The Employee Retention Credit (ERC) is a beneficial payroll tax incentive, conceived to encourage businesses to maintain their workforce throughout the COVID-19 crisis. Initially legislated in March 2020 through the CARES Act, this advantageous credit was further broadened under the Consolidated Appropriations Act in December 2020, and once again under the American Rescue Plan Act in June 2021, amplifying its scope and impact.
What is the Employee Retention Tax Credit (ERC)?
The Employee Retention Credit (ERC) is a refundable payroll tax credit established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It’s designed for businesses that maintained their payroll during
closures due to COVID-19 restrictions or experienced a substantial decrease in gross receipts from March 13, 2020, to September 30, 2021. The purpose of this credit is to provide relief from the economic impact of the COVID-19 pandemic by offsetting the employment taxes paid by employers.
Who Is Eligible To Claim An ERC?
Employers qualify if they had W-2 employees in 2020 or 2021, and ANY of the following occurred: (1099 contractors do not count)
You can still get and ERC even if you already received a PPP loan:
1. If You Experienced A Reduction In Revenue – the results in a credit for each quarter affected. A 50% Reduction By 2020 would yield an even bigger credit.
If your gross receipts decrease by at least 50% between 2019 and 2020 compared to a given quarter, up to $5,000 can be given per employee and/or 20% reduction – equivalent of which could result in 2021 reduction.
If the gross receipts in 2021 decrease by at least 20% when compared with those in 2019 for any quarter, up to $7,000 could be lost per employee per quarter as a result.
2. If Their Business Was Impacted By A Government Mandate – could result in a credit over a date range selected.
1. Government orders had more than a marginal impact on business operations; they required them to fully or partially suspend operations related to said orders; or 2. Suspend operations tied to such orders indefinitely
2. Unable to obtain essential goods or materials from suppliers as they were required to suspend operations due to government orders.
3 Intentionally restricting occupancy levels as social distancing measures.
4. Orders by the government requiring employees to remain at home rather than report for work. 5. Other impacts from government actions.
3. Or If You Started A Business After February 15, 2020 – they may qualify for an ERC via the Recovery Start-Up Program as long as their gross sales did not exceed $1,000,000.
Employee Retention Credit FAQ
Is our business eligible even if we continued operations throughout the pandemic?
For your business to qualify, one or more of the following adverse events must have occurred during 2020-2021: Firstly, business operations were either partially or fully suspended due to orders from governmental authorities in either 2020-2021;
This can occur due to restrictions on commerce, travel restrictions or bans on group meetings.
Criteria for reducing gross receipts vary between 2020 and 2021, but can generally be determined by comparing gross receipts of the current quarter with those from its counterpart in 2019 prior to COVID-19 pandemic outbreak. It may be possible for one quarter but not another.
Originaly, the 2020 CARES Act stipulated that businesses who had taken out Paycheck Protection Program loans couldn’t qualify for ERC grants; however, subsequent legislation has allowed for eligibility in both programs.
What time period is covered by the ERC program?
The ERC program applies to qualifying wages paid to W-2 employees by eligible employers from March 13, 2020 through September 30, 2021.
When is the deadline to claim the ERC?
For eligible quarters in 2020, the last date to claim the ERC is April 15, 2024. For eligible quarters in 2021, the claim must be made by April 15, 2025.
How do I receive my ERC Refund?
Employee Retention Credit (ERC) refunds are issued as cash payments by the IRS, which will then mail them directly to you. Refunds may be distributed proportionately based on qualifying quarters; therefore you may receive multiple checks (for instance).
Note that the IRS can apply these funds as a credit against any outstanding taxes.
Will I need to amend my income tax returns if I apply for the ERC?
Applying for the Employment Registration Certificate will require filing new income tax returns. Under IRS rules, your company’s wage expense deduction on its tax return should be reduced by an amount equal to that paid towards ERC membership fees.
Once the ERC was received in either 2020 or 2021, an amended federal and state income tax return must be filed to rectify any overstatements of wage deduction.
Why has the IRS cautioned about third-party processing companies?
The IRS has issued warnings about third-party processing companies because there has been a rise in the number of self-proclaimed ERC “experts” or “consultants” who misrepresent their expertise and the specifics
of the ERC program to employers. The ERC is a complex tax program that necessitates a thorough understanding and knowledge of its intricacies. When selecting an ERC company, it’s advisable to opt for
companies with a proven track record. Be cautious of potential red flags such as substantial upfront costs or a lack of certified public accountants or tax professionals on their team. \
How long does the IRS reserve as an audit period for my ERC?
The IRS has a period of 3 years to audit the Employee Retention Credit for the year 2020 and the first and second quarters of 2021. For the third quarter of 2021, the audit period extends to 5 years.
How long does it take to receive my refund?
The time required to receive your refund usually depends on the processing capacity of the IRS at any given time. Based on current trends, it has been observed that clients usually receive their refunds within a timeframe of 4 to 10 months following the filing date.
Please note that this timeline can fluctuate as the IRS’s processing times can vary.
Are there any specific rules on how I can use my ERC refund?
The Employee Retention Credit (ERC) is a fully refundable tax credit that offers remarkable financial flexibility. It imposes no constraints on fund utilization, thereby empowering businesses to deploy their refund according to their unique needs and strategic priorities
Is there a requirement to repay the ERC?
No repayment of Employee Retention Credit is necessary; however, should an audit by the IRS uncover discrepancies they reserve the right to seize upon funds awarded through ERC.
Can my business still qualify if we’ve already obtained a PPP loan?
Even if your business has already taken advantage of Paycheck Protection Program (PPP) loans, under the Consolidated Appropriations Act (CAA). ERC calculations only include wages that were not funded through PPP loan forgiveness – otherwise known as non-PLPP wages – so these shouldn’t count towards ERC calculations.
This prohibition coincides with the IRS’s ban on double dipping – the practice of seeking assistance for identical expenses from multiple programs – by disallowing double claiming.
Is my business eligible for the ERC if we’ve experienced a decrease in gross receipts?
Yes, your business may qualify for the Employee Retention Credit (ERC). However, what constitutes “substantial reduction” of gross receipts differs between businesses and states; definition of what constitutes significant decline can differ significantly between industries and states.
2021 data. A “significant decline” is defined as any gross receipts reduction by 50% from 2019 levels compared with the same calendar quarter in 2020, whilst for 2021 this threshold drops to 20% reduction versus 2019.
What are the criteria to be eligible for the ERC?
To qualify for the Employee Retention Credit (ERC), an employer must fulfill one or both of the following requirements.
Experience a significant decrease in gross receipts during any quarter in 2020 or 2021, defined as at least 50% decrease compared to 2019 or 20% drop relative to 2019.
Have experienced either a total or partial shutdown due to directives issued from federal or state authorities governing your jurisdiction, due to COVID-19 pandemic restrictions. Such directives must have restricted commerce, travel or group gatherings.
Am I eligible for the ERC if I’m self-employed?
Am I eligible for ERC if my employees are 1099?
No. The Employee Retention Credit (ERC) may only be claimed on wages paid to W-2 employees; Wages paid to 1099 workers are ineligible for this credit; however, if you had both types of employees during an eligible period (i.e. W-2 + 1099 employees) then those W-2 employees might qualify.
Am I eligible for ERC benefits if my family members are employed under my payroll?
Yes, the Employee Retention Credit (ERC) may be applied for; however it should be noted that it cannot be claimed on wages paid to family members of majority owners (ie extended family). This rule includes non-immediate family as well.
As you would be eligible to claim wages paid to non-family employees only.
Is my business eligible for the ERC if our business income increased?
Yes, even if your business revenue increased significantly, you may still qualify for the Employee Retention Credit (ERC). This credit applies if operations were suspended as per government directives either completely or partially.
What are qualified wages for the ERC?
As part of the Employee Retention Credit (ERC), “qualified wages” refers to compensation that is subject to FICA taxes; this can include salaries, hourly wages, vacation pay and certain health plan expenses..
What is the duration covered by the ERC program?
The Employee Retention Credit (ERC) program covers eligible wages paid from March 13, 2020 through September 30th 2021 by qualifying employers, for which you can claim refunds for 2020 and 2021 after September 30th 2021. You may file applications to get refunds for years 2020-2021 after filing your claims for refunds.
Some of our clients have received refunds only, while others qualify to continue receiving ERC with each payroll they process.
Through December 31st 2021, our clients will have received refunds ranging from $100,000 to $6 Million from us.
Can We Still Qualify for Funds Even Though Gross Receipts Did Not Decrease by 20%?
Yes, your business could still qualify for the Employee Retention Credit (ERC). In such an instance, meeting any of these conditions will lead to eligibility:
Your business operations were suspended due to orders from governmental authorities during 2020 or 2021, such as restrictions on commerce, travel or operations. This may have included restrictions limiting commerce, travel or operations.
Your business experienced a decrease in gross receipts. While the criteria vary from year to year, this reduction can typically be measured by comparing current quarter gross receipts with those from before COVID-19 pandemic hit in 2019.
What documents will I be required to provide in order to qualify for ERC?
To claim the Employee Retention Credit (ERC), businesses will need to present various documents that demonstrate eligibility for and accurately calculate the credit. Depending on their business’s specific needs, different documents may be necessary.
As each business has different needs and requirements, here are some essential documents they usually must present:
Payroll Records: Detailed records of wages paid to employees, such as their names, Social Security numbers, hours worked and wage rates for every eligible quarter from March 13, 2020 until the deadline (which falls on March 16, 2021). These documents should cover this timeframe.
Quarterly Payroll Tax Forms: Form 941 (Employer’s Quarterly Federal Tax Return). These reports report wages, tips, and other compensation paid to employees as well as federal withholding taxes due.
Quarterly Financial Statements: Documents that outline your business’s gross receipts in 2019 through 2021 for each eligible quarter to demonstrate any reduction in gross receipts and show how this impacts profitability. Ideally this would help show any reduction in total gross receipts that has taken place due to lower sales levels (if applicable). This helps demonstrate any decreases.
PPP Loan Information (if Appropriate): If the business obtained a Paycheck Protection Program (PPP) loan, documentation related to it including its amount and terms should be presented. This could include loan amounts as well as payment schedules.
Documenting Qualified Health Plan Expenses (if Applicable): If the business includes qualified health plan expenses as part of its ERC calculation, supporting documentation will need to be presented.
Documenting ERC Credits Already Taken (if Appropriate): If the business has claimed ERC credits in the past, records must exist of those credits taken already.
Support Documents for Additional Eligibility Requirements (if Applicable): Depending on the particulars of each business’s situation, additional eligibility requirements may need to be fulfilled with supporting documentation. For instance, if gross receipts experienced a significant decrease, documents demonstrating revenue figures from relevant quarters should be available for review.
Note: Any interest that the IRS pays must be declared when filing your income tax return.