Employee retention credit (ERC), or Employee Retention Tax Credit (ERTC), is a tax refundable credit for tax-exempt organizations and businesses that experienced financial losses during the Coronavirus pandemic. It was introduced to motivate companies to continue paying their staff. The credit applies to workers in the U.S. Discussed below are four things to know about employee retention credit.
Eligibility for employee retention credit
For employers to qualify for the ERC, either of the following factors must be met:
A business or trade that was partially or fully suspended or reduced its business hours because of a government directive
The ERC only applies for the part of the quarter the business/ trade is suspended and not the whole quarter. Depending on IRS guidance, some don’t organizations don’t meet this factor and wouldn’t qualify, including:
- Those seen as essential, except they have critical goods/ materials’ supply disrupted in a way that impacts their ability to keep operating
- Businesses closed but can keep their operations generally intact via telework
Nevertheless, these organizations may still be eligible for ERC using the second criterion.
An employer with a significant gross receipts decline
For an employer to qualify for ERC based on this factor test, they must compare the 2020 or 2021 quarter to a similar quarter in 2019. For instance, if an employer wants to determine ERC eligibility for Q2 of 2020, they should compare their gross receipts to Q2 of 2019.
Recovery startup businesses
For your business to qualify for credit as a recovery startup, it must have:
- Started trade or business after 5th February 2020
- Annual gross receipts not exceeding $1 million
- Not eligible for ERC under either of the above two categories
Before applying for ERC, consider consulting with a qualified and licensed tax professional to avoid falling victim to misinformation spread by third parties.
Wages that qualify for the ERC
There are various types of wages counted upon qualifying for the credit, including tips, salaries, and particular benefits. Wages that are eligible for employee retention credit include:
Those paid during a partial or complete suspension of business operations
- For 2020, qualified wages should have been paid between 15th March and 31st December
- For 2021, the wages should have been paid between 1st January and 30th September
- For a recovery startup business, qualified wages can extend through 31st December 2021
Wages paid by companies experiencing a significant gross receipts decline
- In 2020, a significant decline in gross receipts was defined as a calendar quarter that’s 50% less than a similar 2019 calendar quarter. After your gross receipts exceed 80% compared to the 2019 corresponding quarter, the significant decline period ends in the following calendar quarter
- In 2021, a decline in significant gross receipts was defined as a quarter whose gross receipts were below 80% of a similar 2019 quarter. For businesses that weren’t in existence in 2019, they’re allowed to calculate their significant gross receipts’ decline by comparing the 2021 calendar quarter to its gross receipts in a similar quarter in 2020
- The credit is also available in the 2021 third and fourth quarters to Recovery Startup businesses that didn’t meet the eligibility criteria stated previously
Health expenses that qualify as qualified wages
Specific health costs are also seen as qualified wages. These are amounts an employer incurs or pays to offer and maintain group health plans. Nevertheless, these costs are restricted to amounts not included in the employee’s gross income.
How to claim employee retention credit
If your company wishes to claim ERC, they must report all their qualified wages plus the relevant health insurance expenses on the quarterly tax returns. If you didn’t claim the ERC when you filed your original employment tax return, you can file adjusted employment tax returns to claim the credit. For instance, if your business files quarterly employment tax returns, you can claim the ERC for the prior 2020/2021 quarters by filing:
- Form 941-X
- Claim for Refund
- Adjusted Employer’s Quarterly Federal Tax Return
When filing Form 941-X, you should lower your wage deduction by the credit amount for that same tax period. As such, you might have to amend the income tax return to reflect the reduced deduction.
Beware of ERC scams
ERC’s popularity resulted in scammers attempting to exploit tax-exempt organizations and businesses. Knowing the possible ERC scam signs to look out for can help ensure your company doesn’t fall prey to scammers. You may be lured into ERC scams through:
- Aggressive marketing, where ERC ads appear almost everywhere
- Key details, like not explaining ERC eligibility correctly, being left out
- Direct mailing
ERC comes in handy for businesses whose operations were affected by the COVID-19 pandemic. Before applying, understand what to know about ERC and how it can benefit your company.