What Is The Employee Retention Credit (ERC), And How Does The Program Work?

When the Covid-19 pandemic began, and businesses were forced to shut down their operations, Congress passed programs to provide financial assistance to companies. One of these programs was the employee retention credit (ERC).

The ERC gives eligible employers payroll tax credits for wages and health insurance paid to employees. However, when the Infrastructure Investment and Jobs Act was signed into law in November 2021, it put an end to the ERC program.

Despite the end of the program, businesses still have the opportunity to claim ERC for up to three years retroactively. Here is an overview of how the program works and how to claim this credit for your business.

What Is The ERC?

Originally available from March 13, 2020, through December 31, 2020, the ERC is a refundable payroll tax credit created as part of the CARES Act (AR-0.3%) . The purpose of the ERC was to encourage employers to keep their employees on payroll during the pandemic.

Qualifying employers and borrowers that took out a Paycheck Protection Program loan could claim up to 50% of qualified wages, including eligible health insurance expenses. The Consolidated Appropriations Act (CAA) expanded the ERC. Employers that qualified in 2021 can claim a credit of 70% in qualified wages.

Who Is Eligible For The ERC?

Whether or not you qualify for the ERC depends on the time period you’re applying for. To be eligible for 2020, you need to have run a business or tax-exempt organization that was partially or fully shut down because of Covid-19. You also need to show that you experienced a significant decline in sales—less than 50% of comparable gross receipts compared to 2019.

If you’re trying to qualify for 2021, you must show that you experienced a decline in gross receipts by 80% compared to the same time period in 2019. If you weren’t in business in 2019, you can compare your gross receipts to 2020.

The CARES Act does prohibit self-employed individuals from claiming the ERC for their own wages. You also can’t claim wages for specific individuals who are related to you, but you can claim the credit for wages paid to employees.

What Are Qualified Wages?

What counts as qualified wages depends on the size of your business and how many employees you have on staff. There’s no size limit to be eligible for the ERC, but small and large companies are treated differently.

For 2020, if you had more than 100 full-time employees in 2019, you can only claim the wages of employees you retained but were not working. If you have fewer than 100 employees, you can claim everyone, whether they were working or not.

For 2021, the threshold was raised to having 500 full-time employees in 2019, giving employers a lot more leeway as to who they can claim for the credit. Any wages that are subject to FICA taxes qualify, and you can include qualified health expenses when calculating the tax credit.

This income must have been paid between March 13, 2020, and September 30, 2021. However, recovery startup businesses have to claim the credit through the end of 2021.

How To Claim The Tax Credit

Even though the program ended in 2021, businesses still have time to claim the ERC. When you file your federal tax returns, you’ll claim this tax credit by filling out Form 941.

Some businesses, especially those that received a Paycheck Protection Program loan in 2020, mistakenly believed they didn’t qualify for the ERC. If you’ve already filed your tax returns and now realize you are eligible for the ERC, you can retroactively apply by filling out the ​​Adjusted Employer’s Quarterly Federal Tax Return (941-X).

Since the tax laws around the ERC have changed, it can make determining eligibility confusing for many business owners. It’s also difficult to figure out which wages qualify and which don’t. The process gets even harder if you own multiple businesses. And if you fill out the IRS forms incorrectly, this can delay the entire process.

If you’re running into issues applying for the ERC, it can be helpful to consult with a tax professional. That person can help ensure that you’re on the right track. You can also check out the IRS’ list of frequently asked questions about the ERC to learn more.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

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