The Employee Retention Credit (ERC) was a total game-changer for a lot of businesses during COVID-19. This tax credit gives employers cash back when they keep workers on payroll during tough times.
Although the ERC expired in September 2021, companies can still claim the tax credit retroactively.
In this article, we will walk you through everything you should know about ERC so you can take advantage of this program before it’s too late!
What Is The ERC?
The ERC is basically free money to help companies hold onto employees when they’re struggling. It was created back in 2020 with the CARES Act and has been expanded and extended a few times since then.
For businesses that qualify, this credit can be worth up to $5k per employee for 2020 and a whopping $7k per employee for 2021. That’s some serious cash refunds!
So, if COVID kicked your business in the teeth financially, the ERC could be a real lifesaver to keep doors open.
How To Claim ERC Retroactively?
Here’s some great news: Employers can go back and claim the ERC for wages already paid after March 12, 2020.
So, for 2020, you can claim credits for eligible wages starting March 13, 2020, through December 31, 2020.
For 2021, the lookback starts even earlier, starting January 1, 2021.
You can go back and claim credits for payroll you already ran during that ERC lookback period – you don’t have to wait until the end of the quarter or year.
Just make sure you were actually eligible and track down the documentation. More on that later.
Who Is Eligible For The ERC?
Not every business can claim the ERC. Your company needs to meet specific criteria:
If you had to fully or partially suspend operations during a quarter because of COVID-19 government restrictions. This includes:
- Restaurants, bars, gyms, and salons forced to fully close or limit capacity
- Companies unable to operate due to stay-at-home orders
- Travel restrictions that severely hurt your business
Or if your gross receipts took a big hit and were less than 50% of what you made in the same quarter of 2019.
If you hit 80% of 2019 gross receipts, you don’t qualify for the tax credit.
Self-employed people and small partnerships can potentially claim a smaller credit, too. So, if COVID crushed your revenues or forced you to close all or part of your business, you likely qualify.
How To Calculate Your ERC?
Figuring out the actual credit you can claim takes a little bit of math:
For 2020, the credit equals 50% of qualified wages paid to each employee, up to $10k per employee annually. For 2021, the credit goes up to 70% of qualified wages, up to $10k per employee per quarter (that’s a total of $28k per employee).
If you had more than 500 employees, you can only claim wages paid to staff who weren’t working. Under 500 employees, you can claim all wages paid during eligible quarters.
- You paid an employee gross wages of $15k in Q1 2021. You qualify as a small employer.
- 70% x $10,000 qualified wages = $7,000 credit per employee
Make sure to do the calculations for each eligible quarter.
What Wages Qualify For The Credit?
You can’t claim the credit for just any wages. The rules are a little tricky here.
- If you had less than 500 FTE employees in 2019, all wages paid can qualify – up to $10k per employee per quarter.
- If you had 500+ FTEs, only wages paid to staff while they weren’t providing services count.
- You can claim the ERC only for wages paid to US employees; you can’t include payments to contractors.
- Wages used for the sick/family leave credit don’t apply.
- Wages must be taxable under federal income tax.
It may look complicated, so hire a tax pro or payroll provider to make sure you claim what qualifies.
How To Claim The ERC Refundable Tax Credit:
You claim the ERC on your payroll tax returns: Form 941.
First, you report the qualified wages paid to employees during eligible quarters.
Then, you calculate the total ERC you’re claiming that you can use as credit against your payroll tax deposit obligations.
If your credit exceeds what you owe, the IRS will send you a refund check for the overpayment.
Just be aware you need to file amended state tax returns in most cases.
Remember, the IRS may request paperwork to validate your eligibility and credit amount, so keep all the paperwork.
How To Maximize Your ERC?
To squeeze the most value from this program, follow these tips:
- Review records and claim credits retroactively for any previous eligible quarters you can.
- Calculate eligibility for each location separately if you operate in multiple states.
- Calculate credits quarter-by-quarter; don’t just total up for the year.
- Small employers get more leeway to claim credits on all wages paid.
- Maintain records of eligibility periods, headcounts, wages paid per employee, and how you calculated the credit.
- Get help! These rules are tricky, so have your tax advisor or payroll provider review them to maximize your credit.
Common Mistakes To Avoid
You may miss out on claiming your ERC if you don’t avoid these mistakes:
- Using the current headcount rather than the 2019 average to qualify as a small employer.
- Claiming credits for quarters without a sufficient revenue decline.
- Forgetting payroll tax credits are reduced once 2021 gross receipts exceed 80% of the same 2019 quarter.
- Counting contractors instead of just W-2 employees in your calculations.
The Employee Retention Credit has thrown struggling companies a major lifeline over the past couple of years. With up to $28,000 per employee available in 2021, this credit can pile up fast into hundreds of thousands in cash back and payroll tax savings. So, if you think your business qualifies, take action now to claim this credit while you still can!