Who Qualifies for Employee Retention Credit: The Complete Checklist

who qualifies for the employee retention tax credit
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When the coronavirus pandemic plagued America, it presented a plethora of challenges that many businesses, both small and large, had to navigate through. Not only did it cause businesses to shut down, but it also forced many people out of work. To help with this, the government created the employee retention credit (ERC).

This credit was put in place to encourage employers to keep their employees on payroll. So what is this credit, and who qualifies for the employee retention tax credit? Continue reading below to learn more about the ERC, who qualifies, and who you can contact for further assistance with submitting the correct documents. 

What Is the Employee Retention Credit?

The employee retention credit, also known as the ERC, was a program created as a part of the Coronavirus aid, relief, and economic security act. The purpose of this program was to act as a temporary relief to help businesses keep their employees on the payroll. Since its enactment, the program has been extended through December 31, 2021. 

This credit first offsets your business’s payroll taxes and then is refundable. So if you claim these credits and they exceed your tax liability, there is a chance you could receive a refund.

Who Qualifies for the Employee Retention Tax Credit?

So who qualified for the employee retention credit? To be eligible for the employee retention credit, nonprofits and private businesses must meet one of the two following criteria. The first criteria is to have a decline in revenue in any quarter in 2020 or 2021. The second criterion is if your business had to close down either partially or entirely due to a government order. 

Revenue Decline Test

It is important to note that the revenue decline test varies between 2020 and 2021. For 2020, your revenue decline must be at least 50% less than the same quarter in 2019. For 2021, the reduction must be at least 20% for any quarter compared to the same quarter in 2019. 

Government Ordered Closure

When the pandemic happened, many businesses had to close down or alter how they did business. Some had to reduce their business hours, whereas others completely closed shop on certain days of the week.

This was mainly because many companies were not considered essential. Another reason businesses had to limit their business hours was to keep up with social distancing guidelines. 

If you had to close your business partially or entirely due to a local, state, or government order, you qualify for the employee retention credit. If you had to alter how you do business and could not complete those tasks remotely, you qualify as well. 

Other ways to qualify for the government-ordered closure:

  • Unable to access vendors used for your business
  • Following social distancing rules and limiting the number of customers allowed in your business
  • Business closure due to a deep clean

Another great example is commonly seen in restaurants. If you own a restaurant but had to close down your dining room area due to a government order, you qualify. Even if you could handle take-out orders, you still had to close down a portion of your business, which counts as a partial closure. 

You qualify if you have a retail store where you sell items at a physical location, but a government order forced your business to close down the storefront. Similar to the restaurant example, you still meet the criteria even if you carried your business operations online. 

What Information Do I Need To Determine ERC Qualification?

You will need several documents to prove that you qualify for the credit. For example, you must be able to provide a summary of your quarterly revenue to show as a comparison for the decline in revenue. 

Additional documentation needed to prove qualification for the tax credit:

  • Location of business operations
  • Number of eligible employees
  • Quarter payroll tax returns
  • Detail wages used for the paycheck protection program if you received a PPP loan
  • Detail of your employee wages with the date
  • Summary of lines of business

It is also helpful to have information on the wages paid to employees who did not work. For example, if you have information on their reduced schedule, it is also best to have that on hand.

To ensure that you have all the information you need to claim the employee retention credit, you may want to reach out to a company specializing in filing employee retention credits for their clients. There are several different reputable companies with tax attorneys and other tax professionals that you can reach out to for assistance. 

How Does the Employee Retention Tax Credit Work?

To calculate how much of the employee retention credit you can claim, you must first decide on what year you wish to claim. In 2020, eligible employers could only claim 50% of the first $10,000 of their qualified employee’s wages.

This meant that for all your eligible employees, you could only claim $5,000 for the entire year. During the year 2020, if you had more than 100 employees, you were only able to claim the wages paid to employees when they were not working. 

2021 Employee Retention Credit

In 2021, the rules changed, making it more advantageous for the employer. Instead of only being able to claim 50% of their qualified employees’ wages, employers were able to claim 70%.

In addition to the increase in percentage, employers could also claim qualified wages per quarter, not just for the year. For example, employers could claim up to $7,000 per employee per quarter, equating to $28,000 per year for each qualified employee. 

Another change was the employee limit. The limit rose from 100 full-time employees to 500. If you had less than 500 employees, you were able to claim the employee retention credit. Companies with more than 500 employees could only claim wages paid to employees who did not work during the qualification period. 

What Are Qualified Wages?

Qualified wages you could claim for the credit are wages subject to FICA taxes. This also includes certain healthcare expenses paid on behalf of the employee. Your business must have paid these wages after March 12, 2020, to qualify for the credit. 

What Is a Qualified Employee?

A qualified employee is one that is full-time based on the Internal Revenue System’s definition of a full-time employee. Per the IRS, a full-time employee is someone who works at least thirty hours a week or at least 130 hours per month. There are two ways to determine an employee’s full-time status: the look-back period method and the monthly measurement method. 

Look-back Measurement Method

Under the look-back measure method, you can determine if you have a full-time employee by examining their employee’s stability period. The stability period is based upon the hours of service the employee provided in the preceding period. 

Monthly Measurement Method

The monthly measurement method determines the employee’s full-time status based on a month-to-month basis. When using the method, you can compare your employee’s hours of service to see if they’ve at least had 130 hours of service each month. If you are unsure what method to use to calculate your full-time employee’s eligibility, be sure to reach out to a tax attorney or other tax professional to help you. 

How To Claim the Employee Retention Credit

Unlike most other programs, there is no actual application for the employee retention credit. Instead, you can claim the employee retention credit on your tax return.

Because the time to claim the credit has already passed, the only way to claim the ERC is by doing so retroactively. Instead of using Form 941 to claim the credit, you will use Form 941-X, the amended version of the original form. 

Depending on your business type, you may be able to claim the credit on Form 9411, which is the Employer’s Annual Federal tax return. You can file the amended version of the Employer’s Annual Federal Tax Return for Agricultural Employees for agricultural employees. 

Employee Retention Checklist

When getting ready to claim the employee retention credit, there is a checklist of things you can follow to ensure that you qualify for the credit. As mentioned earlier, there were two main criteria that you must meet in order to qualify, the decline in receipts and the partial or total suspension criteria. Still, there are other factors you should keep in mind. 

Did You Start a Trade or Business After February 15, 2020?

If you are a small business that started a new business or trade after February 15, 2020, you can qualify for the ERC for the last two quarters of 2021. To qualify for this, your gross receipts cannot exceed over one million dollars for the past three tax years. 

Recovery startup business credits can provide you with an additional $50,000 for the third quarter of 2021 and another $50,000 for the fourth quarter. To see if you qualify, it is best to reach out to a tax professional for further guidance. 

Have You Already Received an ERC Refund?

When the ERC program first came out, many businesses jumped at the opportunity to secure funding. Some companies incorrectly report their income because the credit is quite tricky to calculate, especially for smaller business owners.

In addition, the IRS may have changed the refund amount once it got time to process the amended Form 941. To ensure that you correctly claim the right amount of deductions, you may want to consider having someone take a second look at your returns and your amended form before submitting again for the other tax year you didn’t claim. 

Claiming ERC and PPP

Another program that came about from the pandemic was the Paycheck Protection Program. Most businesses leaned more towards this program because of how much they could qualify, and most didn’t quite understand how the employee retention credit worked. Even more so, if you claimed one, you could not claim the other in 2020. 

To change this, the IRS released a statement claiming that businesses were able to claim both, with a few exceptions. Under section 106(c), eligible employers were able to claim the employee retention credit, even if they received a Small Business Interruption loan through the PPP program. 

If you wish to claim your employee retention credits, you can only claim qualified wages that are not counted as payroll under the PPP loan forgiveness program. You can count those eligible wages through one program, but you can’t claim them through both. 

If you claim the credit under both programs and receive a refund, you will have to pay that back. The IRS will likely send you a letter explaining that you owe them that payment back.

They also may tack on penalties and additional fees for claiming both credits, even if you accidentally claimed the same qualified wages for both programs. To ensure there is no confusion, make sure you go over your documents thoroughly. If you would like additional help, you can contact a reputable tax professional for further guidance. 

Amend Your Form 941-X Today

Now that you know who qualifies for the employee retention tax credit, it is time to get the refund you deserve. Filling out the paperwork is quite tedious, as it requires you to provide many different documents proving that you qualify for the credit, but there is no need to stress.

Partnering with the right tax professional or a company that specializes in handling employee retention credits is a great place to start. Contact us when you are ready to see how much you might receive as an advanced payment. Our team is here to assist you throughout the entire process and answer any questions or concerns you may have. 

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