Claiming Employee Retention Credit (ERC) Eligibility in 2022: Two Ways to Claim

claiming employee retention credit
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It isn’t uncommon for economic uncertainty to have cascading effects on the people in the economy. Small to mid-size businesses worry about the future of their business, and many lay off their employees to keep finances in check. 

To minimize this from happening, Congress created the Employee Retention Credit to help employers claim certain payroll taxes. Instead of waiting to file a payroll tax return to claim the ERC, many businesses have the opportunity to gain immediate access to those funds by requesting an advanced payment from the Internal Revenue Service. 

If you have questions about ERC qualifications and how to apply, continue reading below. This brief ERC guide will cover all you need to know about this tax credit and who you can reach out to for more information. 

What Is the Infrastructure Investment and Jobs Act?

The Infrastructure Investment and Jobs Act, also known as IIJA, is a once-in-a-generation bill passed by President Joe Biden that plans to update and restore the infrastructure of the United States. Under Title VI, Other Provisions of the IIJA bill goes over the termination of the employee retention credit for employers who closed due to Covid-19.

This section revises the deadline to apply for this credit to Oct 1, 2021. Recovery start-up businesses did not have their deadline extended. Their original deadline of Jan 1, 2022, remains. 

What Is the Employee Retention Credit?

The employee retention credit, created by the Coronavirus Aid, Relief, and Economic Security Act, helps businesses keep employees on their payroll. Other laws, such as the American Rescue Plan Act and the Consolidated Appropriations Act, both amend and extend advanced payments and other credits through FY 2021.

Although the spending officially ended in 2021, you still have the opportunity to claim the credit retroactively. Under this employee retention credit, small to mid-sized businesses may receive up to 50% of qualifying wages from Mar 13, 2020, to Dec 31, 2020.

The Consolidated Appropriations Act increases the credit to 70% for employee wages paid through Q4 of 2021, including specific health insurance costs. For the first two quarters of 2021, businesses can use this credit for a maximum of $10,000 in wages per employee.

ERC Eligibility Requirements

To qualify for this credit, your nonprofit or business must meet one of two different requirements in the calendar quarter for which you want to use the credit.

For example, to qualify for the credit, the business must have been partially or fully closed to a government order put in place due to Coronavirus. The second requirement is the business needs to show there was a significant decline in gross receipts.

Significant Decline in Gross Receipts 

The definition of significant decline differs from 2020 to 2021. In 2020 the business must have seen at least a 50% drop in gross receipts for the quarter compared to the same quarter in 2019. In addition to that, the business must also have 100 or fewer full-time workers. 

For FY 2021, the business must have had a 20% or greater drop in gross receipts for the same quarter in 2019. The company should also have between one to five hundred full-time employees. Both of these requirements exclude the owners. 

Additional Advice About Employee Retention Credit

In addition to the required percentage in declined receipts, your full-time employees must meet the Internal Revenue System’s definition of a “full-time employee.” Per the IRS, a full-time employee works at least 130 hours in a month or 30 hours per week.

The Internal Revenue System allows new businesses to use their gross receipts for the quarter they started business as a reference point. This is mainly for businesses that were not around in 2019.

Claiming the Employee Retention Credit

Unlike other available tax credits to business owners, the ERC does not work like a write off. Instead, this helps reduce your portion of the Social Security tax.

Businesses’ options for claiming the tax credit:

  1. Claim the ERC on Form 941 and receive a refund of your previously paid tax deposits.
  2. Reduce employment tax deposits by the number expected for the ERC

In addition to this, if your expected credit was more than your payroll tax deposits, you have the opportunity to request an advance payment. In order to do this, you will need to file Form 7200.

Because the employee retention credit tax expired on December 31, 2021, you must file an amended Form 941X to receive the tax credit. You have the ability to use this form for tax credits in the previous quarter that your business was eligible for but did not claim. 

ERC and PPP Loan

Many business owners wonder if they can file for the employee retention credit if they received a loan from the paycheck protection program. You can claim the ERC, but not for wages expected to be forgiven or already forgiven under the PPP program. 

For example, let’s say you received a Paycheck Protection Program Loan of $30,000 for wages. If you expect to qualify for forgiveness through the Paycheck Protection Program, you won’t be able to use those wages to calculate your ERC amount

Help With Claiming Employee Retention Credit

The government put the Employee Retention Credit in place to help struggling businesses gain access to capital sooner instead of waiting until the following year to file. Filing for the ERC may seem daunting, but it does not have to be.

There are companies, such as ERC Today, who have the expertise and knowledge needed to file your amended or retroactive returns properly. If you need help filing your paperwork for the Employee Retention Credit, contact us now. We can answer any questions or concerns you have about the CARES Act, filing options, and more!

Claiming Employee Retention Credit FAQs

The IIJA changes the Employee Retention Credit application deadline to October 1, 2021, for employers affected by Covid-19 closures. Recovery start-up businesses' deadline remains January 1, 2022.

Businesses can get the Employee Retention Credit even if they got a Paycheck Protection Program (PPP) loan. But they can't claim the credit for wages that will be or have been forgiven with the PPP.

Businesses can claim the Employee Retention Credit by filing Form 941. They can reduce employment tax deposits anticipating the ERC and file Form 7200 for advances if the credit exceeds deposits. After December 31, 2021, they must use Form 941X to claim the credit for previous eligible quarters.

The Employee Retention Credit, valid until December 31, 2021, can still be claimed retroactively by filing an amended payroll tax return with Form 941X for previous eligible quarters.

You can file for the Employee Retention Credit (ERC) on your own by claiming it on Form 941 and possibly filing Form 7200 for advance payment. For retroactive claims, you'll need to amend with Form 941X. However, due to the forms' complexity and calculation accuracy required, many seek help from tax experts or ERC-specialized firms.

No, you don't have to pay back the Employee Retention Credit. It's a refundable tax credit. This means it lowers the payroll taxes you owe.

If the credit is more than your total payroll tax, you get the extra money back. The credit helps businesses hit by COVID-19 and isn't a loan.

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