When the pandemic hit, the government designed the Employee Retention Credit (ERC) as part of the Coronavirus Aid, Relief and Economic Security (CAREs) Act. The tax credit was an incentive for business owners to keep employees on their payroll during a time when businesses were feeling the greatest financial impact of the pandemic. The ERC works by refunding or applying a retroactive credit to qualifying payroll taxes paid or owed.
With three rounds of changes to the tax credit over the last couple years, there is more money than ever on the table. But many organizations don’t realize they qualify, or assume they don’t qualify because they didn’t in the past. As a result, large sums of money — that don’t need to be paid back — aren’t being collected by eligible employers.
Are you one of these employers?
Profitable changes to the ERC
When it was introduced in March 2020, the tax credit only provided refunds or credits equal to 50% of qualified wages paid to employees after March 12, 2020, and before Jan. 1, 2021. The refunds or credits were capped at $10,000 per employee within that 9½-month time frame. Later, the ERC was extended to include wages paid through Sept. 30, 2021, for the majority of businesses and Dec. 31, 2021, for recovery startup businesses.
Now, employers can claim a refundable tax credit against the employer share of payroll taxes equal to 70% of the qualified wages they paid their employees after Dec. 31, 2020, through Sept. 30, 2021 (or Dec. 31, 2021 for a recovery startup business). The limit of $10,000 per employee in paid wages remains the same. However, for 2021, it’s $10,000 per quarter rather than per year. That means eligible employers can receive a much larger ERC — worth as much as $26,000 for every employee they paid in 2020 and 2021.
Extending the credit to include 2021 wages, increased 2021 caps and a higher percent of 2021 wages translates to more refund potential for employers. But how can these and other changes make it easier for employers to qualify for the ERC?
ERC updates that allow more employers to qualify
When the ERC was originally enacted in 2020, many businesses didn’t qualify — often because they hadn't yet felt the full impact of the pandemic on their revenue and operations or they opted for a Paycheck Protection Program (PPP) loan instead of the ERC. But with the recent ERC modifications and extensions, more businesses are discovering they are, in fact, eligible for this substantial tax credit. We’ll get into details around what’s making the ERC more inclusive, but first let's look at how employers can qualify today.
The most recent ERC qualification criteria:
Any size business which experienced any of the below may be eligible for the tax credit:
- Full or partial suspension of business operations during any calendar quarter because of governmental orders limiting commerce, travel or group meetings due to COVID-19. An example of full suspension could be a manufacturer who fully shut down due to supply chain interruptions. An example of a partial suspension could be a restaurant that needed to close its dining room due to local government orders that only allow carryout or delivery services.
- Businesses with a significant decline in quarterly gross receipts compared to the same quarter in 2019 (2020 decline requirement is 50%, 2021 decline requirement is 20%).
- Recovery startup businesses (businesses that began after Feb. 15, 2020).
ERC updates that could increase your eligibility:
- You can claim the ERC even if you received the PPP loan. Originally, employers were not eligible for the ERC unless they repaid their PPP loan by May 18, 2020. Later, the Consolidated Appropriations Act of 2020 repealed that provision. Now, the only restriction is that the same wages cannot be claimed against both the ERC and PPP loan forgiveness.
- The definition of “qualified wages” has expanded. If you averaged 100 or less full-time employees (FTEs) in 2019, all wages paid during the eligible time frame are considered “qualified" for the 2020 tax credit. However, if you averaged more than 100 FTEs in 2019, the only "qualified" wages for a 2020 credit are those paid to an employee when not performing a service (i.e. furlough). This definition loosened substantially for 2021 credits.
For calendar quarters in 2021, if you had 500 or less FTEs in 2019, qualifying wages include wages paid to working or not 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.
For the third quarter in 2021, “severely financially distressed” employers can consider all wages as qualified wages, regardless of number of employees in 2019. “Severely financially distressed” means a decline in gross receipts — gross receipts that are less than 10% of the gross receipts in a calendar quarter as compared to the same calendar quarter in 2019.
- You can now have a smaller decline in gross receipts to qualify. The 2020 eligibility rules required gross receipts to be less than 50% of their 2019 value. Now, gross receipts only need to decline by 20% compared to the same quarter in 2019.
- Certain governmental employers are now eligible. When the ERC was enacted, governments, their agencies and instrumentalities were exempt. The newer 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.
- Recovery startup businesses are included. Originally, the ERC didn’t provide special considerations for businesses that got their start during the pandemic. The American Rescue Plan Act of 2021 changed this criteria. Now, recovery startup businesses can take advantage of the ERC for the third and fourth calendar quarters of 2021. In addition to recovery startup businesses being defined as those that began their trade or business after Feb. 15, 2020, it’s also required that they 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. To be considered a recovery startup, you also must be a business that did not meet the other eligibility criteria.
Get started on evaluating your company’s ERC eligibility
While the ERC program ended for most businesses after Sept. 30, 2021 (recovery startup businesses’ ERC credits ended after Dec. 31, 2021), 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.
There are a variety of factors and details that go into evaluating your business’s eligibility for the ERC, including which quarters you’re eligible for, which payroll expenses and wages qualify, and much more. To ensure you get the maximum credit you are owed and aren’t leaving any money behind, our team of ERC experts can help assess your company’s eligibility. If you qualify, we’ll calculate your credit amounts and file your amended payroll returns with the IRS. And soon after, you'll reap the financial rewards of keeping employees on your payroll when the impact of the pandemic was working against you!
Editor's note: This blog was originally published on Sept. 12, 2022, but was updated on March 29, 2023 with the most recent information.