As part of the newly established Coronavirus Aid, Relief, and Economic Security(CARES) Act, the Employee Retention Credit was incorporated to help a business retain employees throughout the 2020 pandemic.
It was designed as a tax credit and had an initial value of half the qualified salaries. Afterward, the credit was a $5,000 minimum and a $10,000 maximum for each eligible employee's salary between March 2020 and December 2021.
When 2021 came around, the number of salaries that could be qualified jumped to 70%. The maximum wage also increased from an annual $10,000 to a quarterly $10,000.
Having this credit makes it accessible for any business that shows eligibility by paying eligible wages. Despite this, other conditions from 2020 and 2021 must be met for any company with under 500 staff members.
A Few Important Points To Be Aware Of:
1. The Employee Retention Credit Eligibility - Clearly understand how your business needs to qualify to take advantage of the credit.
2. Credit Eligibility Criteria - When you know some of the criteria and what steps to take, you will understand what is required.
3. Eligibility May Not Be Attainable For All - You need to find out how eligibility for Employee Retention Credit works to maximize benefits.
4. Understanding the Necessary Condition - A familiarization of the conditions is needed in order for the credit to be claimed.
5. Submitting to Claim the Employee Retention Credit - Submit by taking advantage of claiming to receive a maximum of $26,000 in credit.
Table of Contents
The Employee Retention Credit Eligibility
Shortly after the American Rescue Plan Act was passed, many businesses, charities, universities, schools, and hospitals became eligible and began filing for the ERC.
Early on, the General Appropriations Act allowed PPP recipients to begin filing and receiving the Employee Retention Credit. Borrowers also included those who were initially ineligible to file. To obtain the tax credit, the business must meet one of two conditions within the months that the credit will be based on. These conditions involve:
1. Whether there was a partial or complete suspension of operations due to a governmental mandate. When the credit is given, it is for the period the business operations are suspended.
2. A significant drop in gross receipts.
When March 2021 came around, Notice 2021-20 was issued by the IRS. This notice detailed the claim process by businesses who wished to file for the Employee Retention Credit and filing and claim the ERC retroactively after obtaining the PPP.
For previous quarters to be claimed for the ERC, Form 941-X needs to be submitted to the IRS. This form is the Modified Employer’s Quarterly Federal Tax Return or Request in Rebate. This needs to be submitted for all quarters in which the credit will cover the qualified and paid wages. There are three ways that the IRS recognizes a business that qualifies. First, a company must retain its employees before the business can file. With the credit made up of half of the qualified $10,000 wages that an employer pays to each employee, there needs to be a suspension in services provided by the company which was a direct cause of COVID-19, or the gross receipts were cut by half of what they usually would be.
The Employee Retention Credit can still be filed for all companies regardless of their size. The local and state governments and businesses that offer small business loans are also included.
To become eligible, there must be at least one condition met. The first condition is based on whether the government suspended the company’s operations partially or entirely due to COVID mandates and took place in any quarter of the calendar year. The second possible condition is whether there was only 50% in gross receipts in the quarters being filed for 2019. As soon as the gross receipts exceed 70%, the business will no longer be eligible for the ERC.
How to Know If Your Business is Eligible
Generally speaking, you can get the Employee Retention Credit when a business's gross receipts for any 2020 fiscal quarter are below 50% of what they were for 2019. Eligibility is no longer possible once their gross receipts hit 80% in any quarter following the filing for the credit.
The company needs to experience a direct financial impact that has caused the business to be suspended during the pandemic. Another effect involves having only 10% in gross receipts in the previous quarters beginning in 2019.
When the business is relatively new, you can file your ERC using the gross revenue of quarters that proceed with revenue that has yet to be reported.
When the credit is received, it will represent 50% of the wages that are qualified with a $10,000 maximum limit. With the credit, it will be for wages made between March 2020 and the end of December 2020, with more than 100 employees working for the business.
When there are fewer than 100 employees, the credit is based on the wages of the total number of employees. This number is irrelevant to the number of employees that were working at the company throughout 2019. This means that even when there are new employees, the company will still obtain the credit if the employee was ever paid.
When more than 100 employees are employed throughout 2019, the company can file for the credit. Credit will only be obtained when the employee has been paid but did not physically work during the qualifying quarter.
For both of these situations, the included wages are the compensation and any costs paid for healthcare.
To obtain the Employee Retention Credit faster, a company could decrease the payroll taxes that each employee pays and gets submitted to the IRS.
Business Types Who Can Claim
As of 2020, the IRS has allowed any organization or company to file for the Employee Retention Credit as long as they showed how the pandemic affected their business. The business must have had decreased operations that could not have been prevented. The gross receipts were significantly less than the previous year's quarters.
Regarding Employee Retention Credit, most businesses need to have their gross receipts from their daily activities below 10%. The amount of hours employees work is at least 10% of all the total hours a business offers.
Applicable To All Companies
Since the start, many businesses have taken advantage of the Employee Retention Credit. Despite this, plenty of companies still have yet to file for the credit or do not choose to file. The reasons for not filing may be plenty, but the most common reasons may be needing the correct information in the eligibility process.
Being available for every business, the ERC is to assist a business financially because of the financial hardship it may have felt from the pandemic the year before.
For official details of the ERC, visit the IRS website.
While each business may open as soon as it has been determined to be done safely, your business could still obtain the credit whether it is now reopened or still closed. The company can also qualify if operations could not be started or a certain amount of operations were restricted.
More on Requirements
Many other entities became eligible to file after the American Rescue Plan Act was passed. These other entities included medical clinics, universities, nonprofits, and local government agencies.
Under the Annual Finance Act, there was an increase in eligibility, which now includes any loan businesses took from the Paycheck Protection Protection. Besides this, the ineligible debtors could now apply and receive the Employee Retention Credit.
To be eligible, the employer must experience at least one issue during the onset of the pandemic. These include:
1. Suspension of business on a temporary or full-time basis or where hours were cut significantly.
2. The credit can also be applied during a quarter where closure occurred for less than a month.
It is essential to understand if your business will be affected. This is why you need to contact the IRS to ensure you qualify. When you find out that your business is eligible, you should take advantage of the opportunity for filing.
Being forced to close is never a good thing to experience as a business, even if the closure was temporary or due to the ability to work remotely. Other businesses closed longer than usual may enjoy the opportunity to file for the credit, especially when the earnings have been low for some time now.
In August 2021, the IRS released its Revenue Procedure 2021-33, which helped create a safety net where the PPP amount could be excluded from filing and other monies that a business had been awarded in the past and not be reflected in the gross receipts a business had to submit to obtain the Employee Retention Credit. The safety net needs to be used by all businesses that have received other help consistently.
More on Eligibility for ERC
Under the Employee Retention Credit, qualifying for it is relatively easy and refundable. The credit is 50% of the wage for an employee, which may stem from taxes collected during employment. The program's goal is to provide financial assistance so that employees can continue to be paid.
When the employer’s operations are suspended due to COVID and enforced by federal mandates, the gross receipts will be low during the quarter.
While the 2021 access to the ERC was readily available and only required adjustments stemming from the ARP Act, the ERC still plays a vital role because the owner has more financial opportunities for recovery.
With a business utilizing the Employee Retention Credit and the Paycheck Protection Program, the business can stay afloat longer.
When eligible, the employer’s credit for 2020 will be a maximum of $5,000. In 2021, the credit increased by $14,000 for each employee's wage. This amount may seem small, but it can quickly add up when you have hundreds of employees. This is one reason a company should not pass this opportunity up to file for the ERC.
You need to understand that differences exist between the ERC and PPP. With the PPP, the business can have any employees working for them and obtain the Employee Retention Credit. While the ERC has no limit on business size, it works best when a business is qualified and has met at least one criterion, which consists of the following.
- Governmental directives covering COVID-19 caused a massive business disruption by suspending operations completely or temporarily during any quarter.
- When the 2019 and 2020 quarters are compared, the gross receipts are all lower than before the pandemic.
On the federal level, the ERC is only obtainable for some federal agencies under the CARES Act.
In January 2021, the guidelines for ERC were amended to permit nonprofits and government agencies that provided hospital and medical care to become qualified to file for the ERC.
To reiterate, the Employee Retention Credit was designed for any business with wages and any other qualifying costs, which must be filed on quarterly taxes. These taxes will be filed using Form 941 every month.
A business can avoid any late penalty when the business is eligible. A qualified business can also benefit from decreased federal taxes on the wages it pays employees.
Besides that, when there was a previous submission of Form 941, and the ERC can be filed, the business can submit a Form 941 that is updated.
The amounts for ERC may also include expenses for healthcare costs or wages that were not chosen to be qualified for them to obtain the Paycheck Protection Program and have their PPP forgiveness determined, as well as any debt that does not get relief.
How is an Employer Eligible?
For an employer to become qualified, they must meet Internal Revenue Codes 52 or 414, which is based on the structure of the business for Employee Retention Credit purposes. Plus, other needs must be met for the company to be qualified for a 2020 filing.
- First quarter gross receipts for 2020 are below 50% of what they were the previous year’s same quarter.
- There was a suspension of all services that involved traveling, meeting, or making a business deal in person, which stemmed from the pandemic.
For the 2021, the employer needs to show one of the following impacts:
- Business activity became extremely limited or suspended due to a mandate passed down by the government to prevent the spread of COVID. These suspended activities included traveling, gathering, or meeting others face-to-face.
- There was a reduced amount of gross receipts totaling 70% between the same quarters of 2020 and 2021.
There was also an increased number of Recovery Startup Businesses opening qualified, which only became ERC eligible during 2021’s fourth quarter. For the Recovery Startup Business to qualify for the Employee Retention Credit, there are a couple of conditions that must be met:
- Company gross receipts are below $1 million
The business began operations on February 16, 2020, or later.
The qualifying wages must stem from payments that have social security and Medicare taxes deducted. Once these are deducted, some changes can be made:
- Payments between March 2020 and January 2021 will be eligible. More restrictions will be present and may involve excluding salaries while filing for the ERC.
When the credit is claimed, the number of full-time employees must be below 100 during 2019 to determine eligibility.
The ERC's eligibility will only occur when the wages and salaries were earned and paid while the company experienced suspended activities resulting from the COVID-19 pandemic. Alternatively, the eligibility can be achieved when there is a decreased amount of gross receipts, and the amount would generally be more than what the earnings currently are if the pandemic had not occurred.
Using criteria to determine the size of a business may result in relationships being created that appear to be buddies or a subsidiary of a parent company.
Internal Revenue Code 414 and 414 provisions for group regulations must be adhered to.
Determining Credits for All Eligible Employees
When there is a need to determine if wages and other costs are eligible, they will become qualified due to business operations being suspended temporarily or ceased altogether. If this happens, the company will qualify for the Employee Retention Credit.
To further understand what eligibility means, some laws cover the eligibility of employers so that the filing of ERC can be determined. When the ERC is selected, the wages and all other earnings can be obtained. The qualified wages have various meanings, which are based highly on a business's size and how many employees are currently employed.
When the amount of staff in 2019 was more than 100, the wages and other costs became eligible once the employee received their wages and benefits. Plus, the wages are qualified when services become eliminated due to the company's financial hardship.
The total wage of what the employee would be paid can be recovered during the 30-day period when the hardship occurred.
With the current information known, eligibility can take place when one of two stipulations are present within any quarter that is eligible for the 2021 ERC:
Before February 2020, if a business were open typically and had below 500 employees within a quarter that qualified, but became financially burdened, then the business would be eligible.
There also needs to be a suspension of services or a 10% loss of the gross receipts for any quarter that qualified. This also applies to a business that has 500 or more employees. This will cause your business to qualify for the ERC when the loss is at least 70%.
When a company's gross receipts are suspended during 2020 and 2021 and are significantly less than what they were for 2019, your business will likely become qualified for the ERC. Having the Employee Retention Credit allows a business to retain staff so that business can continue alongside the COVID outbreak.
Many amendments have been created so that the credit is accessed by more businesses. When you need further information regarding the Employee Retention Credit and whether eligibility is possible, you should be in touch with a financial professional with expertise in ERC. When your company obtains the Employee Retention Credit, it will have the necessary funds to help move your business forward without any worry about being financially strained to pay employees.
Keep in mind that you can still apply for ERC in 2022, 2023, 2024, and 2025. The sunset date to file your application is April 15, 2025. Consult a professional for more info.