The COVID-19 pandemic affected the payroll of more than 45% of small businesses in the US. If your business suffered due to pandemic-related factors, you may be eligible for the Employee Retention Credit (ERC).
Learn more about the Employee Retention Credit and how you can claim benefits even for past quarters.
What Is the Employee Retention Credit?
Congress created the Employee Retention Credit as part of the CARES (Coronavirus Aid, Relief, and Economic Security) Act of 2020. It’s a refundable tax credit that helps businesses cover the cost of keeping personnel employed during the COVID-19 pandemic.
The ERC applies to 2020 and 2021. The ERC expired for most businesses on October 1, 2021. You can apply for the credit retroactively, though.
Which Businesses Are Eligible for the ERC?
Businesses and non-profit organizations may be eligible for the Employee Retention Credit. Certain governmental employers, colleges, and universities are eligible for 2021. The business must have been operating in 2020 and/or 2021.
Large and small employers can be eligible, but the terms of the credit vary. To be eligible, employers must have experienced either:
- Full or partial closure because of a government order related to the COVID-19 pandemic, or
- A significant decline in gross receipts
Full or partial closure of the business could have occurred during any quarter of the year. Your business could be eligible even if you maintained normal operations for part of 2020 or 2021. Partial suspension means that activities representing more than 10% of gross receipts or total employee hours had to stop due to the government order.
The definition of “significant decline” in gross receipts differs for 2020 and 2021. For 2020, your business must have lost more than 50% of gross receipts compared to the same quarter in 2019. For 2021, you must have lost 20% or more of gross receipts compared to the same quarter in 2019.
If your business wasn’t operating in 2019, you can use the gross receipts from the quarter you started the business as the reference point.
Eligibility for 2021 Q4
Most businesses aren’t eligible to claim the ERC in the fourth quarter of 2021. The only exception is a recovery startup business. Recovery startup businesses can claim ERC benefits for wages paid between July 1, 2021, and December 31 2021.
A recovery startup business is an organization that started operations after February 15, 2020, and averaged less than $1 million in annual gross receipts.
How to Calculate the ERC
The size of the tax credit your business could receive depends on several factors. The calculation can be complex. Consulting with an expert accounting firm will help ensure that you claim the ERC correctly.
Qualified Wages
The amount of the Employee Retention Credit is based on a percentage of qualified wages you paid to employees. Qualified wages are any salary or wages you paid employees during the quarter for which you’re applying for the ERC. Qualified wages include allocable health plan expenses the business paid for the employees.
Number of Full-Time Employees
Employers with more than 100 full-time employees in 2019 have a more restricted definition of qualified wages for 2020. The only qualifying wages are those paid to employees who were not working due to closure or the decline in gross receipts.
Employers with 100 or fewer full-time employees in 2019 can consider all wages paid to employees during the applicable quarter(s) as qualified wages. This includes wages paid to employees who were still working.
The limit increased from 100 to 500 full-time employees for 2021. The change made more businesses eligible for a larger tax credit.
The IRS considers employees to be full-time if they work an average of 30 hours per week or 130 hours per month.
Tax Credit Maximums
In 2020, eligible employers can claim 50% of qualified wages. The maximum amount of qualified wages the IRS will consider is $10,000 per employee. This would result in a tax credit of up to $5,000 per employee.
The credit is more generous for 2021. For the first three quarters of 2021, eligible employers can claim 70% of eligible wages. The limit of $10,000 per employee is now per quarter instead of for the year. This results in a maximum of $7,000 per quarter per employee, which totals $21,000 per employee for the year.
ERC and Other Pandemic Relief Programs
You may be able to claim the Employee Retention Credit if you have received other federal pandemic-related relief. However, you can’t use wages that you have already used to claim those benefits when you file for the ERC.
For example, receiving one or more PPP loans no longer disqualifies you from claiming the ERC. That restriction ended in 2020. However, you can’t claim the ERC using the same qualified wages you used to obtain PPP loan forgiveness.
How to Apply for the ERC for Past Quarters
Eligible employers can still claim the Employee Retention Credit. You need to file an adjusted employment tax return. For most businesses, you’ll file Form 941-X.
The IRS period of limitation for filing Form 941-X is three years from the date that you filed the original Form 941. For example, if you want to retroactively claim the ERC for the third quarter of 2020, you need to submit the amended return before October 2023.
You’ll need to file a different Form 941-X for each quarter for which you want to claim the ERC.
Factors to Consider when Claiming the ERC for Past Quarters
Filing Form 941-X to claim the ERC for previous quarters will affect other areas of your business taxes. You’ll need to reduce your deduction for wages by the amount of the credit. You may need to amend your income tax return to account for the smaller deduction.
Take Advantage of the ERC
The Employee Retention Credit can provide a significant benefit for your business if you qualify. It can help offset some of the difficulties you faced during pandemic-related shutdowns.
You can apply for the ERC for past quarters, but you should act quickly. The period of limitations is approaching.
Propel CFO is a full-service accounting firm that specializes in tax laws relating to small and mid-sized businesses. Our professional team has experience in a wide range of industries. We can help you file for the ERC correctly and before the deadline.
Contact us today for a free consultation. We’ll help you get all the tax benefits your business deserves.