Employee Retention Credit Examples: The SMB Guide

Key Takeaways:

• • The ERC credit is available to businesses that either shut down because of a government order in 2020 or 2021 or saw a decline in gross receipts when compared to 2019.

• • The credit is 50% of employee wages, up to $10,000 per employee annually, for 2020, and 70% of wages, up to $10,000 per employee per quarter, in 2021.

• • The ERC ended on September 30, 2021, for most businesses, but you can still claim it for three years after you first submitted your tax return.

• • Example 1: A small catering business with 20 employees that shut down operations in three quarters of 2020 could receive an ERC of $100,000.

• • Example 2: A small nonprofit with 10 employees that saw a 50% loss in gross receipts in one quarter of 2021 could receive an ERC of $70,000.

• • You may also need to amend your annual tax return since you need to lower your deduction for wages by the amount of your credit, per the IRS.

• • You can now claim the ERC even if you also received a PPP loan during the pandemic, as long as you don’t claim the same wages that were covered by the loan. 

Small business owners are likely aware that the government passed legislation during the COVID-19 pandemic to give business owners new options for relief. One initiative was the Payment Protection Program (PPP), which helped employees keep their staff with a large loan option that could be completely forgiven. 

The employee retention credit (ERC) was another form of government relief introduced during the pandemic. The ERC helps employers get a break on their payroll taxes to keep people on their payroll. It was first introduced in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), but it was later amended and extended by subsequent laws: the Taxpayer Certainty and Disaster Relief Act, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act.

Both the PPP and ERC have technically ended, as businesses have been able to function more normally in recent months. Businesses can no longer apply for a PPP loan. If you qualify, however, you can still claim the ERC, possibly until 2024. 

What does it look like to claim the ERC, and how much money could you get to help you cover payroll taxes? This guide will walk through the basics of the tax credit, provide in-depth employee retention credit examples, and answer 10 frequently asked questions about the ERC.

How Does the ERC Work?

Let’s first talk about what the ERC is, how it works, and how much it can impact your small business. The CARES Act was passed in March 2020 by the government to help Americans deal with the economic impacts of the pandemic. Tax relief initiatives like the ERC were introduced so employers could keep their doors open and people could keep their jobs. 

The ERC is a fully refundable tax credit, which means that you can still get a refund, even if the amount of your credit is more than your tax liability. Here are the basics of ERC eligibility, limits, and terms:

• • Eligibility: There are two ways you can qualify for the ERC:
    • • Your business had to either suspend operations, full or partially, because of a government order in 2020 or 2021.
    • • Your gross receipts for a quarter were 50% less than the same quarter in 2019 for 2020 quarters, or 20% less than the same quarter in 2019 for 2021 quarters.

• • Credit amount: The ERC amount is different for 2020 and 2021, as follows:
    • • 2020: 50% of qualified wages paid to employees, up to $10,000 per employee for all quarters.
    • • 2021: 70% of qualified wages paid to employees, up to $10,000 per employee per quarter.

• • Annual limits: For 2020, the annual limit is $5,000 per employee per year, and for 2021, the limit is $21,000 per employee per year.

• • Term period: The ERC began on March 13, 2020, so there are three quarters that can qualify for 2020 – Q2, Q3, and Q4.  For 2021, the ERC ended on September 30, 2021, for most businesses, so three quarters can qualify – Q1, Q2, and Q3.

• • Recovery startup businesses: If your business started operations after February 15, 2020, and brings in less than $1 million in gross receipts, you are considered a recovery startup business. This means you can take the credit for the last quarter of 2021 as well.

• • Business size: In 2020, a large employer was considered a business with more than 100 employees, and in 2021, new legislation dictated instead that large businesses were those with more than 500 employees. This is important because large employers can only claim wages paid to employees for not providing services.

Even if you haven’t claimed the ERC yet, you still have time. You can claim it retroactively, using IRS Form 941-X, within three years from your initial tax return date or two years from when you paid the tax, whichever is later. Make sure you consider all eligibility requirements before you apply for the ERC. 

Employee Retention Credit Examples

All this information helps you determine if you qualify and get a picture of how much your credit may be. But how do you calculate the ERC? What does the process look like? The following are detailed examples of calculated employee retention credit, including ERC filing examples, to help you understand how it works.

Example 1: A Nonprofit with 20 Employees

Business eligibility: A small nonprofit with 20 full-time employees had to partially shut down its operations in three quarters in 2020: Q2, Q3, and Q4. Those three quarters would qualify for the ERC, no matter if the business had a loss in gross receipts.

Determining qualified wages: Since the quarters were in 2020, the employer can claim 50% of up to $10,000 for each employee paid across all quarters – so, the business can claim $5,000 per employee per year, totaling $100,000.

Filing and claiming the credit: The business submits Form 941-X for each applicable quarter with these calculations to claim the credit retroactively on a previously submitted quarterly tax return. The IRS will issue a cash payment.

Example 2: A Catering Business with 10 Employees

Business eligibility: A small catering business with 10 full-time or part-time employees saw a 50% loss in gross receipts in Q3 of 2021 when compared to Q3 of 2019. This quarter (Q3 2021) would qualify for the ERC.

Determining qualified wages: The employer can claim 70% of up to $10,000 for each employee paid in that quarter, so the total that can be claimed is $7,000 per employee, or $70,000 total.

Filing and claiming the credit: The business submits Form 941-X for Q3 of 2021 with these calculations to claim the credit retroactively on a previously submitted quarterly tax return. The IRS issues a cash payment.

The ERC is a significant credit for small businesses, as these examples illustrate. Simply by qualifying for one quarter in 2021, a business with only 10 employees could still get $70,000. This is precisely why the ERC is the largest government stimulus program the country has ever seen.

FAQs about the ERC

You may still have a lot of questions about the ERC, your eligibility, and how to claim it retroactively. These FAQs will help you get additional clarity on how the credit works:

1. Is It Too Late to Claim the ERC?

You still have time to claim the ERC. Determine which quarters qualify and calculate eligible wages. Then, you will need to file IRS Form 941-X for the applicable quarter or quarters to amend your original tax return – Form 941, Employer’s Quarterly Federal Tax Return.

2. Will I Need to Amend My Income Tax Return?

The IRS states that you must lower your deduction for wages by the amount of your credit. This means you may need to amend your annual income tax return, too, to show that lower deduction amount. 

3. How Will I Receive the ERC?

The ERC is unique in that it is not treated as an income tax credit. Instead, you will receive a cash payment from the IRS. This could be the full credit amount, but if you had a tax liability, the credit will be minus that amount.

4. How Do I Use Form 941-X?

Find IRS Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. You’ll have to provide your business’s basic information, like your address, name, and employee identification number (EIN). Make sure you select the quarter you’re applying for. 

Enter all your calculations in the section for employee retention tax credit, qualified wages, and qualified healthcare expenses. You must also provide a detailed explanation of how you arrived at your calculations.

5. Is the ERC Available for 2022 or 2023?

No. The qualifying ERC period ended for most businesses on September 30, 2021. Recovery startup businesses have until December 31, 2021. The ERC was not extended for 2022 or 2023.

6. How Long Will It Take to Get My Refund?

The IRS experienced significant delays and challenges during the pandemic, which caused delays in taxpayers receiving their refunds. These delays may still impact when you receive your ERC refund. 

The IRS website says that most tax refunds are issued within 21 days, but there may be complications that get in the way. It can sometimes take a few months or almost a year for the agency to process an ERC refund. 

You can use the Where’s My Refund tool to check your status, and after 21 days or more since you filed, the tool will direct you to the right phone number to contact the IRS.

7. Does the Size of My Business Matter?

Any business that has at least one employee can qualify for the ERC, as long as it meets the other eligibility requirements. However, large businesses, which are those with more than 100 employees in 2020 and 500 employees in 2021, can only use wages that were paid to employees who weren’t providing services during qualifying quarters.

8. Which Quarters Qualify for the ERC?

Not all quarters are included in the ERC for 2020 and 2021. For 2020, quarters two (beginning March 13, 2020), three, and four qualify. For 2021, quarters one, two, and three qualify. Recovery startup businesses can also qualify for the last quarter of 2021.

9. Where Can I Find Instructions for Form 941-X?

The IRS releases detailed instructions for filling out Form 941-X to provide assistance when calculating your ERC and completing the form. Make sure you’re using the most recent version of both the instructions and the form.

10. Can I Claim the ERC If I Received a PPP Loan?

Yes. Initially, businesses that received a PPP loan could not also claim the ERC, but legislation updates changed that. You can now apply for the ERC even if you got a PPP loan for your business, as long as you do not count wages that were covered by your loan.

Don’t delay in claiming the ERC if you’re eligible. The three-year period gives you plenty of time to retroactively apply for the ERC and amend your previously submitted quarterly tax return, but you should do it as soon as possible to get your refund. Contact an ERC professional if you still have questions about calculating or filing the ERC properly.

We Help Businesses With Unique Cases and Examples When Attaining the ERC

The ERC calculation examples provided show you just how much you can get by applying for the ERC, even if you run a very small business. Make sure you determine which quarters in 2020 and 2021 you’re eligible for and calculate employee wages accordingly. 

The team at ERC Today is ready to help you get your credit. We always provide speed and accuracy in our services, whether you need to apply for the ERC, file an amended tax return, or receive tax consulting services. We can answer any questions you may have about tax credits for your business.

Contact ERC Today for more information about your employee retention credit options.