Many business owners are hurrying to apply for the Employee Retention Credit (ERC) in the belief that any interruption of their operations during the pandemic will entitle them to this credit.
Unfortunately, however, not all disruptions caused by COVID-19 qualify a business for this credit. Rather, businesses must meet certain conditions and criteria in order to take advantage of the ERC.
Therefore, it is important for business owners to understand what constitutes an eligible disruption before they rush to submit their applications.
The Employee Retention Credit, however, is not available to all businesses affected by the pandemic. Merely being affected may not be enough to make a business eligible for the reimbursement.
To qualify for this refundable credit, there must be more than just an impact from the pandemic - specific criteria must also be met in order for a business to take advantage of this opportunity. Check out our example of the employee retention credit calculation.
Many employers are well-acquainted with the Paycheck Protection Program (PPP), but the Employee Retention Credit (ERC) is a less widely known assistance program created under the same Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Despite its relative obscurity, it is an incredibly useful tool for businesses struggling to remain afloat during this difficult period.
The Employment Retention Credit (ERC) is an advantageous tax rebate, created to recognize and compensate employers who have stayed loyal to their employees in spite of the financial hardship caused by the COVID-19 pandemic.
This refundable credit offers a beneficial reward for businesses that maintained their staff throughout this tumultuous period, enabling them to reclaim some of the costs incurred as a direct result of their commitment to sustaining employment.
Unfortunately, it is not uncommon for ineligible business owners to be misled into believing that they qualify for the Employee Retention Credit (ERC). This can result in significant risks and ramifications if an audit occurs; such as having to pay back the credit amount plus applicable penalties, interest, and possibly even incurring other liabilities.
In the year 2022, the Internal Revenue Service (IRS) issued Notice IR-2022-183, advising employers to be vigilant and alert the IRS of any erroneous Employee Retention Credit (ERC) claims.
As the IRS has been increasing its oversight in this area, it is essential that employers accurately comprehend all the criteria necessary for receiving an ERC refund. This will help protect taxpayers from any potential frauds or scams.
The Employee Retention Credit: What Is It?
The Employee Retention Credit (ERC) was created as a response to the economic crisis brought about by the COVID-19 pandemic. This refundable tax credit is designed specifically for eligible employers, providing them with financial support in order to help retain their employees in this period of uncertainty and hardship.
The ERC serves as an important measure to protect businesses and workers alike from the impact of the global health crisis.
Qualifying employers who are eligible for the Employee Retention Credit (ERC) can receive a credit of 50% of the qualifying wages they pay to their employees, up to $5,000 per employee in 2020.
This is an effective way for employers to offset the costs incurred by retaining or rehiring and restoring wages for their employees during this challenging economic period.
In 2021, qualifying employers have the potential to receive a credit of 70% of the qualifying wage – up to $7,000 per employee per quarter in quarters 1, 2, and/or 3. Additionally, businesses that started their operations during the pandemic are eligible for a Quarter 4 credit in 2021.
This benefit is available exclusively to Recovery Startup Businesses and can provide a great financial boost as they continue to establish themselves in this difficult economic climate.
Many business owners and accountants may find the rules and regulations of the ERC (Employer Relief Credit) to be quite intricate and bewildering.
It is essential for employers to remain vigilant as there has been a marked increase in attempted scams that seek to exploit companies who are inexperienced with the ERC by encouraging them to apply for credits they may not be eligible for.
Employers should thoroughly assess their situation before applying for this credit to ensure that they meet the criteria established by the government in response to the negative impacts of COVID-19 on business operations.
Ultimately, if a business is able to demonstrate significant disruption due to the pandemic, then it may be eligible for this credit and should pursue application accordingly.
It is anticipated that employers will encounter an increased number of ERC audits in the foreseeable future, and any business that has incorrectly submitted its application for the Employee Retention Credit could soon be confronted with punitive repercussions.
For the ERC, who is eligible?
An employer must fulfill the following requirements in order to be eligible for the Employee Retention Credit:
- The employer must be an eligible entity in order to qualify for the program. This includes businesses that were either completely or partially suspended due to government mandates related to the COVID-19 pandemic, as well as those that have experienced a significant reduction in their gross receipts compared to the corresponding quarter of 2019.
- The employer must have eligible wages in order to receive the Employee Retention Credit (ERC). This means that employers who obtained Paycheck Protection Program (PPP) loans are not allowed to use the same wages they utilized to apply for PPP forgiveness towards applying for the ERC. Furthermore, owners' wages are also ineligible and cannot be used when attempting to qualify for the credit.
- The employer must adhere to the full-time (or equivalent) employee limitation, which involves ensuring that they have a total of 100 or fewer full-time employees on average in 2019 for credit in 2020. Similarly, they must maintain an average of 500 or fewer full-time employees on average in 2021 if they wish to receive credit for that year. This regulation is expected to be strictly enforced and failure to comply may result in penalties being given out by the relevant authorities. Otherwise, if the employer is considered a large employer for Employee Retention Credit (ERC) purposes, then the qualifying wages are subject to restriction and only include those wages paid to employees for time that they were not providing services.
- The size and eligibility of the employer may be contingent upon whether the business must be consolidated as a single entity for Employee Retention Credit (ERC) purposes. This aggregation requirement is necessary in order to determine if the organization meets the criteria to qualify for ERC benefits.
- Certain businesses that are affiliated with each other through common ownership must be treated as one single employer for the purpose of determining eligibility for the Employee Retention Credit (ERC). This requires that the total gross receipts and number of employees across all related entities be combined, then compared to relevant thresholds set forth by the ERC.
If an employer satisfies all of the qualifying criteria, they may be eligible to receive a tax credit up to a maximum amount of $26,000 per employee. This credit is available for those employers who meet the criterion and may provide great financial benefit to them.
When Is the Qualifying Period for the ERC?
The Employee Retention Credit, which begins on March 13, 2020 and continues through the end of the third quarter of 2021, offers a significant incentive for businesses to retain their employees. For Recovery Startup Businesses that qualify for the program, this credit is available through the fourth quarter of 2021.
Whether an employer qualifies for relief under the significant decline rule is determined on a quarterly basis. In order to be eligible, the employer must compare its gross receipts from the same quarter in 2019 with those of either 2020 or 2021 and demonstrate that there has been a substantial decrease in revenue over that period.
This comparison will allow employers to determine if they are able to meet the criteria necessary to qualify for relief.
In order to be eligible for the payroll tax credit known as 'suspension of operations, businesses must have fully or partially ceased their activities during a certain period, mandated by a government authority due to the COVID-19 crisis.
In order to make use of this credit, employers should amend their quarterly payroll tax return by filing Form 941X.
The CARES Act, passed in response to the coronavirus pandemic, included the Employee Retention Credit (ERC) as a way of helping businesses that were adversely affected by the economic downturn.
This tax credit provides a vital source of support to many business owners who are struggling to keep their enterprises afloat; however, not all are eligible for this form of relief.
Despite the fact that it has been available for some time, numerous businesses remain to this day unaware of their qualification for the Employee Retention Credit (ERC) or the proper way to apply.
If you are uncertain whether or not you fit the necessary criteria, or if you’re still unclear about which wages count towards eligibility, it is imperative that you find guidance on ERC matters without delay.