As with many government programs, the Employee Retention Credit (ERC) is no stranger to change. Having undergone three rounds of revisions since its March 2020 inception, the ERC is a far more beneficial and inclusive program than when it started. That said, with change comes questions. Here’s a quick Q&A that includes the most vital information you need to know about the ERC — as it stands today.
What is the ERC?
When the pandemic hit, businesses were under great financial stress. In response, the government designed the ERC as an incentive to help business owners keep employees on their payroll. The ERC provides qualifying businesses with a refund or retroactive credit for payroll taxes on wages they paid to employees in 2020 and 2021.
How long do you have to 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.
Who is eligible for the ERC?
A wide range of employers are eligible, including but not limited to those in the following industries: education, government, health care and life sciences, hospitality, retail, industrial, professional services, real estate, construction, and technology.
Not-for-profit organizations are also eligible for the ERC for both 2020 and 2021, if their operations were either fully or partially suspended by a COVID-19 government order. Eligible non-profits include organizations described in section 501(c)(1) and exempt from tax under 501(a). Colleges, universities or organizations whose main purpose is to provide medical or hospital care can also qualify under this criteria.
How much ERC money is available?
Qualifying employers are eligible for up to $26,000 for every employee they paid in 2020 and 2021. Yet, most organizations aren’t taking advantage of the opportunity to claim the money they are owed — either because they aren’t aware they qualify or they weren’t eligible in the past. Now, the government has revised the rules to make it easier to qualify.
For example, previously, the ERC only covered qualified wages paid between March 12, 2020 and before Jan. 1, 2021. It was worth 50% of paid qualified wages — up to $10,000 in wages per employee. For 2020, this is still the rule.
For 2021, the time frame has extended to include 2021 eligible wages — but now at 70% (not 50%) of paid qualified wages. Like 2020, 2021 had a wage max limit of $10,000 per employee. Now, 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 monetary potential for employers.
What qualifies businesses for the ERC?
There are a few main questions to be considered for ERC eligibility:
- Did your company experience a reduction in gross receipts?
- Did your business operations experience a full or partial shutdown, even if the business grew over the pandemic?
- Are you considered a recovery startup business?
If you answered yes to any of these questions, you may be eligible for the ERC. Not sure? Here’s more in-depth questions to consider:
What does a reduction in gross receipts mean?
Gross receipts include total sales (net of returns and allowance), all amounts received for services, and any income from investments and outside sources (e.g., interest, dividends and royalties). Gross receipts typically are not reduced by cost of goods sold.
To evaluate your ERC eligibility, you will need to determine if your business saw a decline in gross receipts for any individual quarters. In 2020, if your business had a 50% or more decline in gross receipts compared to the same quarters in 2019, you are eligible for the ERC. For 2021, if your business saw a 20% or more decline compared to the same quarters in 2019, you are also eligible.
What does full or partial shutdown mean?
You could qualify for the ERC if your business experienced:
- Full or partial suspension of business operations during any calendar quarter because of governmental pandemic orders limited your commerce, travel or group meetings.
- Limited capacity, a reduction in services or inability to work with your vendors.
- Supply-chain interruptions or a reduction in operation hours that impacted your profitability.
How does the ERC define a recovery startup business?
For ERC tax credits, a recovery startup business:
- Must have been founded after Feb 15, 2020.
- Must have less than $1 million in revenue for the 3 taxable-year period ending with the taxable year before the calendar quarter that the credit is determined.
- Doesn’t meet other eligibility criteria — a full or partial suspension or decline in gross receipts.
How do ERC-qualifying wages differ for large versus small businesses?
Under the ERC, small employers’ benefits can include wages to all employees. Large employers are limited to including only those wages paid to employees who did not provide services.
What qualifies as a small versus large business?
For the 2020 ERC, an employer with 100 or fewer average full-time employees (as measured in 2019) is defined as a small employer.
For the 2021 ERC, an employer with 500 or fewer full-time employees (as measured in 2019) is defined as a small employer.
As measured in 2019, a full-time employee is defined as an employee who works an average of at least 30 hours per week or 130 hours in the month (130 hours of service is treated as at least 30 hours of service per week, in accordance with section 498H of the Code).
Can I claim the ERC after receiving a Paycheck Protection Program (PPP) loan?
When the ERC was first enacted, employers couldn’t receive the ERC unless they essentially forfeited the opportunity for loan forgiveness and repaid their PPP loan by May 18, 2020. That is no longer the case. You can now claim the ERC even if you received a PPP loan that was or was not forgiven.
However, there is an exception. The same wages cannot be claimed for both the ERC and the PPP loan. To clarify, businesses looking back between the approved ERC period from March 13, 2020 to Sept. 30, 2021 (or through Dec. 31, 2021, for recovery startup businesses), often find quarters where the PPP loan wasn’t used. Under the new changes, the ERC funds may be used for those qualifying wages and additional expenses like health care costs.
Can my business qualify for the ERC even if it didn’t open until after 2019?
Yes, if you started your businesses in 2020, you 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. Recovery startup businesses can also claim the credit for the third and fourth quarters of 2021. For more information, consult IRS notice 2021-49.
Does my company need to pay back the ERC?
No. The ERC isn’t a loan and doesn’t need to be paid back.
How do I file a claim for the ERC?
To file a claim, businesses need to file an amended Form 941-X (Quarterly Federal Payroll Tax Return) for the quarters the business was eligible. The ERC program offers businesses the ability to claim money lost from the pandemic. But it’s complex and not easy to accurately calculate to ensure you’re receiving the maximum credit amount allowable.
Luckily, there is help available. Our team of ERC experts are available to help you evaluate your eligibility, and then calculate and file your ERC for you. Ready to take the first step in claiming your ERC money? The first thing you need to do is determine your eligibility. You can do this using our free assessment tool, which you can access via the below button.
Editor's note: This blog was originally published on Sept. 19, 2022, but was updated on March 29, 2023 with the most recent information.