There are 32.5 million small businesses, which accounts for 99.9% of all businesses in the US. In March 2020, 70% of all small businesses temporarily shut down when the pandemic spread through the US.
In the subsequent months and years, the federal government offered several financial support options to help small businesses survive the pandemic.
One of the things was the employee retention credit available on businesses’ taxes. There were some recent changes to employee retention credit eligibility.
As a small business, you want to ensure you’re taking advantage of every financial opportunity from the federal government for your business. Read on to learn who is eligible for employee retention credit and what impacts eligibility.
Tax Credits from the IRS?
It might be surprising that the federal government is, in a sense, giving away money to small businesses. The Employee Retention Credit or ERC did just that.
It was a way to support small businesses to help them through the challenges of the pandemic by offering a tax credit on business taxes.
Businesses could:
- Take advantage of reductions in federal employment tax deposits
- Request tax-credit advances for amounts that aren’t taken care of through the use of deposit reductions
While many COVID relief supports garnered a lot of attention, the ERC is unknown to many businesses (like ERC for Dentists, or ERC for Churches). You don’t want to miss your chance to take advantage of these tax credits.
ERC Eligibility Checklist
- Is your business located in the United States?
- Have your operations been fully or partially suspended due to a governmental order related to COVID-19?
- Have you experienced a significant decline in gross revenues during the COVID-19 pandemic?
- Are you conducting business as a trade or business under Internal Revenue Code Section 162?
What Is an Employee Retention Credit?
Let’s start with a basic understanding of what employee retention credit is and how it works for small businesses. The ERC offers a refundable payroll tax credit against certain employment taxes paid by a small business.
Normally, a business is required to make employment tax deposits at intervals directly to the IRS. The ERC allows an immediate credit on those tax deposits.
Original Employee Retention Credit
It’s also important to understand the original criteria for the ERC to understand the current legibility better.
The ERC was available to small businesses that:
- Showed qualified wages for businesses with 100 or fewer full-time employees
- Operations were suspended due to COVID-related shutdown orders
- Quarterly gross receipts declined by 50%
In its original incarnation, a business that took advantage of the Payroll Protection Program or PPP could not also use ERC. More on this shortly.
Employee Retention Credit Eligibility Now in 2023
Let’s now take a look at the 2022 ERC eligibility. The original ERC ended on Dec. 31, 2020.
Now, small businesses have an extension and can include qualified wages paid from Jan. 1, 2021, through Dec. 31, 2021.
Some significant changes to ERC include:
- 500 or fewer FTE employees. this was previously 100 or fewer employees
- Must still either have been fully or partially suspended due to a shutdown order
- Suffered a qualifying gross receipts decline
Other changes include:
- Quarterly gross receipts decline was changed to 20% decline from the previous 50% decline
- Supply chains issues were added if they caused a suspension of business operations
- “Qualified wages” now include group health plan expenses, even if other wages were not paid
For employees who were furloughed during the pandemic but still received pre-tax health benefits, those pre-tax health benefit costs will count as a qualified health expense when a business does an ERC calculation.
Previously, the credit allowed for 50% of qualified wages up to $10,000. Now, that credit has increased to 70% of qualified wages.
More on available 2020 and 2021 credits shortly.
Employee Retention Credit and the Payroll Protection Program
Many businesses were able to take advantage of the Payroll Protection Program (PPP) through the 2020 CARES Act. Through the CARES Act, small businesses that took advantage of PPP could not also use the ERC.
This is one important change to ERC that small businesses need to know.
Now, any wages not paid with PPP funds are eligible for ERC credits. It’s also worth noting this is a retroactive change.
So, it’s likely that many businesses that are eligible for refunds for payroll taxes already deposited in 2020.
How Is PPP Different from ERC?
Both the PPP and the ERC are programs from the federal government, yet there are some key differences between the two programs.
The PPP had limits on funds depending on the availability through the federal government. The ERC did not have limits. If a business qualifies, the benefits are available.
The PPP is a loan where forgiveness is available. Instead, the ERC is a credit that’s given to businesses as a payment directly from the IRS.
For businesses who took advantage of the PPP from the CARES Act, it’s significant they can now retroactively use ERC for credits of wages not paid by the PPP.
What Credits Do Businesses Qualify For?
You might be wondering how much the credit is worth to your business. Remember, the goal of employee retention matters and how and when the employee was paid their wages during the qualifying years.
| Year | Credit Percentage of Qualified Wages | Max Qualified Wages Per Quarter | Max Tax Credit Per Employee | Exclusions |
|---|---|---|---|---|
| 2021 | 70% | $10,000 | Not specified | Owners and their family members with at least 50% ownership |
| 2020 | 50% | $10,000 | $5,000 | None mentioned |
Please note that for both years, ‘qualified wages’ includes both wages and payments for health care costs per quarter.
2021
The American Rescue Plan extended the ERC tax credits through the end of 2021.
In 2021, 70% of qualified wages for the allowed amount are available per quarter. In 2021, the allowable wage amount is $10,000 per quarter.
The one exclusion for this credit is owners and their family members who have at least 50% ownership in the business.
2020
Between March 13, 2020, and Dec. 31, 2020, qualified wages can get a credit of 50% of qualified wages of up to $10,000.
2020 tax credits are maxed out at a $5,000 tax credit per employee for the year.
It’s important to understand the distinction of qualified wages. It includes both wages and payments for health care costs per quarter.
Take Advantage of Employee Retention Credit Eligibility
As a business enters the 2022 tax season, awareness of the employee retention credit eligibility for small businesses could be a significant credit.
Changes to the ERC allow more businesses to take advantage of those tax credits for the 2020 and 2021 tax years.
To get your questions answered about the ERC and how it could benefit your business, contact us today to learn more.
