Did You Keep Employees On During the Pandemic? You did the right thing by keeping people on your payroll during the COVID-19 pandemic. Now, something good may happen to your business as a result (if you qualify). If you own a small business, you may be eligible for the Employee Retention Credit (ERC). It’s a refundable tax credit for companies that kept employees on the payroll during the COVID-19 pandemic.
The ERC was established in 2020 through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It helps businesses that kept workers on their payroll during the pandemic’s economic upheaval.
The credit’s changed over time, eligibility has expanded, and it’s available to employers who received Paycheck Protection Program (PPP) loans. Most eligible businesses can use the ERC for wages paid from March 13, 2020 to September 30, 2021. How much you benefit from the ERC depends on when you can file a claim.
For the 2020 tax year, if you’re eligible, you can get a credit on half of qualified wages up to $5,000 per employee for March 13, 2020 to December 31, 2020. For 2021, it’s 70% of qualified wages, up to $7,000 per employee per quarter, with a limit of $21,000 per worker.
Does Your Business Qualify for the ERC?
It’s tax law, so it’s not straightforward. Requirements for claiming the ERC for 2020 are different from 2021 eligibility. For 2020:
- You faced full or partial suspension or limits on your operation in any calendar quarter due to COVID-19-related governmental orders limiting travel, commerce, or group meetings, or
- Your business’ gross receipts in the second, third, or fourth quarter declined by half compared to the same periods in 2019
- Your business faced fully or partially suspended or limited its operations in any calendar quarter due to governmental orders limiting commerce, group meetings, or travel because of COVID-19, or
- Your business had a 20% drop in gross receipts in any of the first three quarters of the year compared to your gross receipts in the same calendar quarter in 2019
Seeking the credit by showing reduced gross receipts may be the better way to go:
- It’s simpler
- You’d use objective, not subjective, evidence which the IRS may be less likely to dispute
- You’ll qualify for the ERC in the next quarter. Under the suspension test, you’ll only be eligible for the time a government order affected your business
Do Recovery Startup Businesses Qualify for ERC?
Recovery startup businesses have ERC eligibility into 2021’s third and fourth quarters. A recovery startup business is one:
- That opened after February 15, 2020
- With an average annual gross receipt of less than $1 million
- Fails to meet either the suspension test or the gross receipts test for the relevant quarters
The top ERC for these businesses is $50,000 for each of 2021’s third and fourth quarters.
What Are Your Qualified Wages?
Your entitlement is based on your “qualified wages.” They are employee wages you’ve paid that were subject to:
- FICA taxes
- Any health plan costs related to those wages
There are exceptions, including:
- Wages used to obtain PPP loan forgiveness
- Credits or relief you received because of the Families First Coronavirus Response Act, the American Rescue Plan Act of 2021, and the Work Opportunity Tax Credit
- Wages paid to those owning more than half of the business
- Wages paid to employees related to the employer, including spouses
How Do You Claim the ERC?
If you’re eligible, file Form 941-X to change your initial filing of Form 941 (Employer’s Quarterly Federal Tax Return). You have three years from the date you initially filed Form 941 to file a Form 941-X. If you’ve run the numbers, you can estimate your ERC refund with an online tool like EY’s ERC calculator.
If you haven’t claimed the ERC yet, it may be worth considering. This IRS comparison chart gives a more detailed look at 2020 and 2021 ERC requirements and calculations. If you’re unsure if this is worth exploring, talk to your CPA, tax advisor, or a qualified ERC expert. Did You Keep Employees On During the Pandemic? You May Qualify for a Tax Credit
Get the Help You Need From a Lawyer You Can Trust
We don’t specialize in taxes, but if you have questions or want help with the ERC, contact us, and we’ll connect you to the right people to meet your needs. Call Focus Law at 714-415-2007, so we can talk about your situation and provide you assistance.