Don’t think your company qualifies to receive the Employee Retention Credit (ERC)? You may want to take a closer look at how it’s changed over the years — and how those changes could (quite literally) pay off. A lot of companies that once thought they weren’t eligible for the ERC are now collecting large sums of money. Don’t disqualify your business, even if it wasn’t eligible in the past.
Today, it’s easier than ever to qualify. That said, employers are overlooking the ERC because they aren’t aware of the more lenient qualification criteria and greater credit potential. Here’s a breakdown of the latest rules that are qualifying so many more businesses for this very lucrative credit.
1. You can claim the ERC even if you received a Paycheck Protection Program (PPP) loan.
When the credit program guidelines were first enacted, employers couldn’t receive the ERC unless they repaid the PPP loan by May 18, 2020. In other words, they could choose to receive a PPP loan and the ERC, but this meant they’d have to pay their PPP loan back rather than wait for loan forgiveness. The result was that employers were incentivized to opt for either the PPP loan or the ERC — not both. With the latest updates to the ERC guidelines, you can now receive it even if you received a PPP loan that was later forgiven.
The only restriction is that the same wages cannot be claimed against both the ERC and PPP loan. But PPP funds only account for a small portion of monthly payroll expenses. As a result, when eligible businesses look back between the approved ERC time period — March 13, 2020 to Sept. 30, 2021 (or through Dec. 31, 2021, for recovery startup businesses) — they often have qualifying wages they didn’t pay using PPP money. They may also have additional qualifying payroll expenses, such as health care costs, that can be used to maximize their ERC.
2. The decline in gross receipts isn’t as steep as it used to be to qualify for the ERC.
Another rule that’s opening up the ERC to more businesses and offering bigger returns is the percentage drop in sales. To be eligible for the ERC in 2020, businesses’ gross receipts must be less than 50% of their 2019 value. That’s the original rule and is still the case for 2020 quarters, but 2021 offers even greater opportunity. Under newer ERC guidelines, 2021 gross receipts only need to decline by at least 20% when compared to 2019, allowing more businesses to take advantage of the lucrative ERC program in more calendar quarters.
3. You can qualify even if you were profitable overall in 2020 and 2021.
Many employers don’t realize that you can evaluate your ERC eligibility on a quarterly basis. For example, even if you were profitable in 2020, but show a 50% or more quarterly decline compared to the same quarter or quarters in 2019, you can still qualify to reap the rewards of the ERC. If you saw an overall profit in 2021, but had a 20% or more quarterly decline compared to the same quarter or quarters in 2019, you also qualify. In other words, overall profitability isn’t really a factor. If you experienced a large enough decline in gross receipts for any individual quarters, you qualify.
4. If you had to adapt to interruptions in your business — even without a gross reduction in receipts — you likely qualify for the ERC.
You qualify for the ERC if you had a full or partial suspension of business operations during any qualifying calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19. Did your company experience limited capacity, a reduction in services or were you unable to work with your vendors? Did supply-chain interruptions or a reduction in hours of operation impact your profitability? If so, you could qualify and get big refunds by claiming the ERC.
5. Businesses that didn’t exist in 2019 are still eligible for the ERC.
When the ERC was introduced in March 2020, it didn’t consider new businesses that launched during the pandemic. The first round of changes to the ERC rules in 2021 provided a new rule for employers who weren’t in existence in 2019. Employers who started their businesses in 2020 can determine ERC eligibility by evaluating if there was a decline in gross receipts — simply compare the gross receipts in a 2021 calendar quarter to gross receipts from the same calendar quarter in 2020.
With a second round of rule revisions to the ERC in 2021, “recovery startup businesses” became eligible to claim the credit for the third and fourth quarters of 2021. Recovery startup businesses are employers who began their trade or business after Feb. 15, 2020; had average annual gross receipts under $1 million for the 3-taxable-year period ending with the taxable year before the calendar quarter that the credit is determined; and didn’t meet the other eligibility criteria — a full or partial suspension or decline in gross receipts.
6. More employers with over 100 full-time employees (FTEs) can qualify.
Originally, if you averaged 100 or less FTEs in 2019, all wages paid during the eligible period were (and are) considered “qualified." However, if you averaged more than 100 FTEs in 2019, the only "qualified" wages were those paid to an employee when not performing a service (i.e. furlough), during the eligible time frame.
The latest revisions to the ERC changed these rules. For calendar quarters in 2021, if you had 500 or less FTEs in 2019, qualifying wages include wages paid to working or non-working employees. For businesses with more than 500 FTEs in 2019, qualifying wages include only employees not providing services but getting paid during the eligible quarters. This means organizations that have more employees (up to 500 in 2019) have more revenue potential for the ERC when calculating 2021 wages.
The latest rules also state that for the third quarter in 2021 “severely financially distressed” employers can consider all wages as qualified wages — regardless of the number of employees in 2019. To be “severely financially distressed” means that your gross receipts are less than 10% of the gross receipts in a calendar quarter as compared to the same calendar quarter in 2019.
7. The ERC is available to certain governmental employer organizations.
When it was first introduced in March 2020, the ERC rules didn’t include governments, their agencies and instrumentalities. The most recent eligibility rules now include certain governmental employers for calendar quarters in 2021. Qualifying employers include organizations described in section 501(c)(1) and exempt from tax under 501(a); as well as colleges, universities or organizations whose main purpose is to provide medical or hospital care.
8. You can still claim the ERC.
The ERC program concluded in Q3 2021 for most employers. That said, you can still retroactively claim the tax credits for three years from April 15th of the succeeding year you filed your taxes. For example, if you filed your taxes during any quarter in 2020, you would have until April 15, 2024 (three years from April 15, 2021) to claim the ERC. If you filed your taxes during any quarter in 2021, you would have until April 15, 2025 (three years from April 15, 2022) to claim the ERC. In other words, you still have time to collect your ERC money.
9. You could get an extremely lucrative claim — up to $26,000 for every employee you paid in 2020 and 2021.
Most businesses and charities are eligible for the ERC. The credit is considered one of the one of the most valuable returns businesses can claim, yet so many businesses haven’t taken advantage of it. As a result, the government has revised the rules three times since March 2020 to make it easier for even more businesses to qualify.
As the Internal Revenue Service (IRS) rolled out new guideline after new guideline, the ERC has become more lucrative for employers. For example, the ERC originally only covered wages paid between March 12, 2020 and Jan. 1, 2021, and was worth 50% of paid qualified wages up to $10,000 in wages per employee.
This is still the rule when evaluating 2020 paid wages. However, the time frame extends to include 2021 eligible wages — but at 70% (not 50%) of paid qualified wages. Like 2020, 2021 had a wage max limit of $10,000 per employee, but this time, it is per quarter — unlike the year before when it was $10,000 per employee for the entire time frame.
The inclusion of 2021, along with the larger percentage of qualified wages and the higher wage caps (due to quarterly, not annual caps) results in more money potential for employers.
With so many complexities and changing rules surrounding the ERC, you want to be sure you’re accurately evaluating your business’s eligibility and maximizing your credit amount. That’s where B2E Solutions comes in. To ensure you aren’t leaving any money behind, our expert ERC team can help assess your company’s eligibility, calculate your credit amounts and file your amended payroll returns with the IRS. From here, you simply sit back and wait for your money.
Editor's note: This blog was originally published on Sept. 20, 2022, but was updated on March 29, 2023 with the most recent information.