The pandemic hit companies hard due to government shutdowns and lockdown orders. To help stay afloat, many companies made use of PPP loans. Some companies also took advantage of another program, Employee Retention Credits (ERC). The ERC program involves credits businesses can claim on qualified wages, even including some health insurance costs that are paid to employees.
When first introduced, businesses could only take advantage of either PPP loans or ERCs. Most businesses chose to use PPP loans to help survive during the pandemic. But updates to the program made it possible to claim both, and you can make claims retroactively by filing amendments on your payroll taxes. While the Infrastructure Investment and Jobs Act on Nov. 15, 2021, retroactively ended the program on Sept. 30, 2021, eligible businesses can still retroactively claim their tax credits.
I have found many clients are unaware of this program. Clients who have filed the amendments to claim their ERCs have been able to get a lot of money back, some as high as seven figures. While there are a few caveats, it would be wise to see if you qualify for the credits. This article is a simple overview of the program. If you’re looking to claim these credits, work with your tax professional and accountant to ensure you qualify and file correctly.
Eligibility
The criteria for qualifying for the credits include suspended operations in 2020 and 2021 or a decline in gross receipts.
2020
Fully or partially suspended operations due to government order
Had gross receipts decline of 50% when compared to the same quarter in 2019. This will qualify you for the quarter of the decline and the quarter that followed.
2021 (only includes Quarters 1 through 3)
Fully or partially suspended operations due to government order
Had gross receipts for any quarter or for the immediately preceding quarter that are less than 80% of gross receipts when comparing to the same quarter in 2019
Recovery Startup Business
If you started your business after Feb. 15, 2020 and have average annual gross receipts less than $1 million, you qualify as a Recovery Startup Business and are eligible to claim credits on qualified wages through Dec. 31, 2021.
The max amount that can be claimed on this credit is $50,000 per quarter
Recovery Startup Businesses are only eligible for these credits in Q3 and Q4 of 2021
Qualifying Wages
Once you’ve determined your business’ eligibility, you need to figure out what counts as qualifying wages. Generally, wages and compensation that are subject to withholding tax count as qualifying wages. Health insurance may also qualify when calculating your employee retention credits. ERC excludes vacation, holiday and qualified sick and family leave. One important thing to note is that wages qualifying for Paycheck Protection (PPP) must be excluded from these ERC wages. You cannot claim wages paid by a PPP forgiven loan. The biggest factor in deciding the qualifying wages is the number of full-time employees. There are also slightly different criteria depending on the year you are retroactively claiming the credits. Below are the criteria for 2020 and 2021.
2020
Small employer (Fewer than 100 FTEs in 2019): All wages paid during the quarter are eligible to receive a $5,000 credit ($10,000 of eligible wages) per employee per year.
Large employer (More than 100 FTEs in 2019): Only wages paid for the period/s in which the employee did not perform services for the employer.
2021
Employer (less than 500 FTEs in 2019): All wages paid during the quarter are eligible to receive a credit equal to 70% of the first $10,000 paid on qualifying wages (70% of wages with a$7,000/employee cap per quarter).
Employers with more than 500 FTEs are not eligible for the credits.
How to Claim
To claim the Employee Retention Credit, employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns, which will be Form 941 for most businesses. As mentioned, you can retroactively claim these credits by filing an amended Form 941 also knowns as a 941x. You must file the amendment within three years of the original filing deadline to claim these credits. It’s also important to note that nonprofits are eligible to claim the ERCs.
As with any tax related programs and credits, its important to consult with a tax professional and CPA. They can help guide you in claiming these credits and filing amendments.