There were 18.1 million people unemployed during COVID-19. Sixty-three percent of those couldn’t work due to their employer closing or experiencing a decline in business. The survival of many jobs and businesses is due to the employer taking advantage of the Employee Retention Credit (ERC).
If you are a business receiving this credit, you may want to do a look back to see if your company qualifies for additional credits. If you are unaware of this benefit, there is still time to apply.
Keep reading for answers to the most common employee retention credit FAQ.
1. What Is the Employee Retention Credit (ERC)?
The ERC is part of the COVID-19 relief legislation commonly known as the CARES Act (Coronavirus Aid, Relief, and Economic Security Act). It was expanded by the Consolidated Appropriations Act, and modified by the American Rescue Plan Act of 2021.
The purpose of the employee retention tax credit is to help businesses keep employees on the payroll during COVID-19. It provides small and medium-sized businesses with a significant, fully refundable, tax credit.
For the 2020 calendar year, the ERC equals up to 50% of qualifying wages per employee. This includes health plan expenses. The credit applies to wages paid between March 12, 2020, to November 1, 2021.
The maximum credit is $5,000 (50% of $10,000 in wages) per employee per quarter. This is a maximum credit of $15,000 per employee per quarter.
During the 2021 calendar year, the credit is 70% of $10,000 in wages per employee per quarter. This is a potential $28,000 total credit per employee. This later dropped to $21,000 per year per worker in 2021 due to program changes.
The credit the business receives offsets all federal withholding. This includes federal income tax withholding, Medicare, and employer FICA. The IRS refunds or advances any excess credit.
2. How Does a Business Qualify for ERC?
To qualify, the business or non-profit needs to experience any of the following during the 2020 and/or 2021 calendar years:
- Interruptions to business—reduction in services, supply chain, reduced hours of operation, etc.
- Government COVID-19 orders fully or partially shut down business
- 50% decline in gross receipts on or after March 13, 2020
- 20% decline in gross receipts for 2021
To establish the decline in gross receipts you must compare each quarter of 2020 or 2021 with the receipts from the same quarter in 2019.
The operation of a business suffers a partial suspension when the government restricts its ability to operate at full capacity. This can be the result of a limit on commerce, group meetings, or travel. It may also be a “stay at home” order for non-essential businesses.
3. Can I Apply for PPP and ERC?
The Payment Protection Program and Employee Retention Credits are different types of assistance.
The Payment Protection Program is an SBA-backed loan. Its purpose is to help small businesses keep workers on the job during the COVID-19 pandemic. The program ended on May 31, 2021, but existing borrowers may be able to apply for PPP loan forgiveness.
Businesses with 300 or fewer employees and an existing PPP loan may take a second draw as part of a COVID relief plan. The second draw uses the same loan terms as the initial loan. To qualify, the business must also show a 25% or more reduction in gross receipts for comparable quarters in 2019.
Most borrowers of the second draw receive 2.5x the 2019 or 2020 average monthly payroll costs, up to a total of $2 million. For borrowers in the accommodation and food services industry, the second draw was allowable a 3.5x the monthly average, up to $2 million.
The money from the PPP loan can help pay for:
- Mortgage, rent, or lease payments
- Operating expenditures
- Worker protection expenditures necessary for COVID-19 compliance
- Property damage costs due to public disturbances not paid by insurance.
Sections 206 and 207 of the Taxpayer Certainty and Tax Relief Act (2020) make it possible for employers to receive ERC even if they have a PPP loan.
4. What Are Qualifying Wages?
There are rules establishing a qualifying wage. The eligibility requirements include employers taking PPP loans, who were initially disqualified from ERC.
Wages meeting qualifications are those paid during a calendar quarter the business suspended operations between March 13, 2020, and December 31, 2021. Health care expenses follow the same rules as qualifying wages, including pretax contributions of the employee and employer.
Qualifying wages are based on the number of full-time employees the company has. The variable is a comparison of 2020 and 2021.
In 2020, companies with over 100 full-time employees during 2019 can consider qualifying wages to be those of employees not working due to closure, or a decline in business.
Companies with less than 100 full-time employees in 2019 can claim all employee wages as qualifying. This includes wages paid when not working because of a reduction in business or suspension.
In 2021, an employer with more than 500 full-time employees during 2019 can claim the credit. The credit is for wages paid to employees not working because of a revenue reduction or mandatory closures.
If the company has less than 500 employees in 2019, the credit is applicable against all employee wages during periods of a revenue reduction or mandatory closure.
IRS FAQ #59
In addition to the numbers, The IRS FAQ #59 establishes specific people who are not qualifying employees:
- Family members, including siblings, children, parents, and grandparents, or a decedent of a child
- Mother, father, brother, sister,
- Step-sister, step-brother, step-mother, step-father
- Mother-in-law, father-in-law, daughter-in-law, son-in-law, brother-in-law, sister-in-law
- Niece, nephew, aunt, uncle
In addition to the above, self-employment earnings do not qualify. Neither do wages for someone who is a spouse, ancestor, or anyone that meets the description of indirect ownership.
5. Is ERC Available in 2022?
The quick answer is yes, you can apply for ERC in 2022. If you did not apply, the government is allowing companies three years to look back at wages paid. This covers wages you paid employees after March 12, 2020.
If you determine you are eligible, you may file an amended Quarterly Federal Payroll Tax Return, Form 941X. You must file a separate form for each quarter you are eligible for credit.
If you believe you may be eligible, talk to an ERC professional as quickly as possible. The government has a backlog of amended Form 941-X filings because of the changes made in 2021.
Amended forms already on file at the IRS are taking 6-10 months to process. For those filing now, the anticipated wait time is around 16 months or more.
Answers to the Employee Retention Credit FAQ
Now that we have answered the most popular Employee Retention Credit FAQ, you may have additional questions or concerns about eligibility. ERC Today can provide you with the help you need to apply or amend your Paycheck Protection Program and Employee Retention Credit forms.
Our initial analysis of your business to determine eligibility and approximately how much credit you are due is 100% free. If you decide to use our assistance in filing for ERC, we collect a percentage of the IRS employee retention credit you receive.
Contact ERC Today to find out what credits your business qualifies for and how we can help.