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The COVID-19 pandemic created many challenges for businesses of all sizes. When operations had to be suspended or limited, hundreds of thousands of businesses had to close for good or at least temporarily. The government thus introduced a few tax benefits to help businesses retain employees and stay afloat.

The employee retention credit (ERC) was included in one piece of relief legislation in March of 2020 — the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It was created so employers would be incentivized to keep their workers on the payroll during the most tumultuous months of the pandemic.

While the ERC program is now technically closed, having ended for most businesses on September 30, 2021, eligible employers may still be able to claim the credit retroactively.

So what is the ERC and who is eligible to take it? This post will walk through all the basics you need to know.

What Is the ERC?

The ERC, first introduced in 2020, is a fully refundable credit that businesses can claim on wages paid to their employees, as long as those wages qualify. Under the CARES Act, employers can claim the credit for 50% of wages paid out between March 13, 2020, and the end of 2020, up to $10,000 for the year per employee.

The Consolidated Appropriations Act altered and extended the program in 2021. Qualifying employers could then claim a credit against 70% of qualified wages, and the limit went up to $10,000 per employee for each quarter, instead of per year, for the first two quarters of 2021.

Then, the American Rescue Plan Act of 2021 further extended the ERC. The credit stayed at 70%, up to $10,000 for each employee per quarter, so an employer could claim a total of $7,000 for each employee in each quarter. This comes to a total credit of up to $21,000 per employee for the year 2021.

The majority of businesses have to adhere to the program end date of September 30, 2021, but the legislation made room for a group of Recovery Startup Businesses, which can claim the ERC through December 31, 2021. These businesses had to have started operating after February 15, 2020, and have average gross receipts of less than a million dollars.

Who Can Claim the ERC?

The ERC is available to most types of employers. While businesses who received a loan from the Payment Protection Program (PPP) weren’t eligible initially, the Consolidated Appropriations Act expanded the program to include those employers.

Organizations have to meet one of these two terms to claim the ERC:

• The business or trade had to fully or partially suspend operations or reduce hours because of a pandemic government order.

• The employer saw a steep decline in gross receipts. To qualify in 2020, gross receipts in a quarter had to be below 50% of gross receipts when compared to the same quarter in 2019. To qualify in 2021, businesses had to see greater than a 20% decline in gross receipts in a quarter, compared to the same quarter in 2019.

In addition, if you weren’t yet in business in 2019, the IRS allows you to use your 2020 gross receipts for the same quarter in your comparisons.

Following the end of the ERC program — which is September 30, 2021, for most businesses — employers get three years to look back and see if any wages since March 12, 2020, are eligible.

An Example of ERC in Action

So what could the ERC actually look like for your business? Let’s walk through an example as a guide: Say your business had to suspend operations for quarter one of 2021. You have five employees, each of which you paid $10,000 in qualified wages during that first quarter. Because the maximum is $10,000 in qualified wages, and you can claim 70% of that, you would be able to get a credit of $35,000. You simply multiply five employees by $7,000.

As you can see, the employee retention credit is a pretty significant tax break, which is especially crucial for employers who dealt with challenges during the pandemic.

Getting Accounting Help for Your Firm

Even if you missed claiming the ERC over the last couple of years, you still may be able to retroactively claim it, back to the beginning of the ERC program. If you’re unsure if you qualify or don’t know how to proceed, talk to a professional about your options.

The team at Shurek Accounting & Tax is here to help. We can help with payroll, bookkeeping, and accounting solutions to help you create a more efficient business overall.

Reach out to our team today to learn more about our services.

CITATIONS:

IRS. “COVID-19-Related Employee Retention Credits: Determining When an Employer is Considered to have a Significant Decline in Gross Receipts and Maximum Amount of an Eligible Employer’s Employee Retention Credit FAQs.” December 27, 2021. https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-determining-when-an-employer-is-considered-to-have-a-significant-decline-in-gross-receipts-and-maximum-amount-of-an-eligible-employers-employee-retention

IRS. “Employee Retention Credit – 2020 vs 2021 Comparison Chart.” May 5, 2022. https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart

Paychex. “The Employee Retention Tax Credit Program Has Closed But Businesses Can Retroactively Claim Credit.” January 19, 2022. https://www.paychex.com/articles/compliance/employee-retention-credit

QuickBooks. “How to calculate the Employee Retention Credit.” April 2, 2021. https://quickbooks.intuit.com/r/taxes/employee-retention-credit-calculator/

Thomson Reuters. “Employee Retention Credit.” January 10, 2022. https://tax.thomsonreuters.com/en/glossary/employee-retention-credit