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The Employee Retention Credit (ERC) is a refundable tax credit that was introduced as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Businesses that struggled through the worst months of the pandemic but continued to pay their employees' wages have through 2024 to claim their employee retention credits through the IRS.
In this guide, we’ll define what employee retention credits are and how to determine if your business is eligible to receive them.
Employee retention credits allow small employers to claim credit on qualified wages they paid to their employees during 2020. Specifically, the ERC allows employers to receive up to 70% retention credit for the qualifying wages their employees were paid from March 13th to December 31st, 2020. The program was implemented and designed to encourage businesses to retain their full-time employees during the worst months of the Coronavirus pandemic and only requires businesses to meet a few simple requirements to qualify.
The employee retention tax credit is based on a business’s employee cap and qualified wages. If your business meets specific requirements regarding how they paid employee wages and retained those same employees during the applicable period, you are entitled to a credit that is claimed against either Medicare or Social Security taxes.
It’s important to note also that these rules can change based on whether or not your business has fewer than 100 employees or, in some cases, fewer than 500. If the amount you are owed as a credit exceeds your liability to either of those tax obligations in a given quarter, you receive the difference as a credit at the end of that quarter.
In 2020, only two primary requirements were used to determine if you counted as an eligible employer. Per the IRS, eligible employers in 2020 must meet both of these requirements:
• Fully or partially suspend operation during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
• Experience a significant decline in gross receipts during the calendar quarter.
As of 2021, these eligibility requirements have been adjusted. Specifically, the definitions of ‘suspended operations’ and ‘significant decline’ have been updated to be more exact. For your operations to be considered fully or partially suspended, more than a ‘nominal’ portion of your operations must have been put on hold. The IRS considers a nominal portion of your business to be more than 10%, meaning that if your gross receipts from a given period have a greater than 10% difference from that same period in 2019, that difference is considered more than nominal and thus qualifies.
In short, yes. Using IRS Form 941-X, an employer can still retroactively claim the ERC benefits for up to three years after the original payroll taxes were due.
This means, effectively, that your business can claim an ERC from 2020 until April 15th of 2024, and an ERC from 2021 until April 15th of 2025. Note that if your business applied for a PPP loan, the way your employees’ initial qualified wages were reflected on the loan application will affect the eligible wages for an ERC. Additionally, the IRS has stated explicitly that any expenses eligible for PPP forgiveness that were not included in your initial application cannot be included in the figures you use when determining the tax credit you could receive through an ERC.
The eligibility requirements for which small businesses qualify for an ERC have changed since the benefit was first implemented. The CARES Act first set out the qualifications, which provided businesses a 50% tax credit of up to $10,000 in maximum credit in a calendar year. These entities had to have suspended, either partially or fully, their business operations as a result of a government order related to COVID-19. These requirements, including what type of business is eligible to apply for ERC, changed over time as new acts were passed.
The CARES Act was passed on March 27th, 2020, and was designed to provide coronavirus aid to businesses struggling as a result of lockdowns, partial shutdowns, and loss of business due to governmental orders. The CARES Act first established the Paycheck Protection Program (PPP) and set forth the initial requirements for the ERC. At the time of the CARES Act, businesses that took a PPP loan did not qualify for an ERC.
The Consolidated Appropriations Act was signed into law in December of 2020. It greatly expanded the scope of businesses that can claim ERCs. The CAA allows business owners to claim employee retention credits even if they received or applied for a PPP loan – something they could not do prior to the Act’s passing. The CAA also extended the window for retroactive eligibility into the first two quarters of 2021.
The American Rescue Plan Act is the final extension for ERC eligibility and extended the program into the last two quarters of 2021. The Act also expanded the type of organizations that could be considered eligible. For the first time, tax-exempt organizations such as universities, colleges, hospitals, and 501(c) organizations were able to qualify for the credit.
Finally, the Act allows businesses to use gross receipts from a corresponding quarter in 2019 to determine their eligibility for 2020 and 2021. This is the most recent act with relevant impacts on ERCs.
The American Rescue Plan Act specifically addresses additional eligibility extensions for recovery startup businesses. According to the Act, a recovery startup business is considered an entity that:
• Was started on or after February 15th, 2020
• Has annual gross receipts that don’t exceed $1 million
• Employs one or more employees
If your business is considered a recovery startup, it can receive a 2020 ERC for 50% of all qualified wages paid from March 12th, 2020, to December 31st, 2020, up to a total of $10,000 per employee per quarter. You can also receive an ERC for 2021 that goes up to 70% of the total qualified wages you paid your employees from January 1st, 2021, until September 30th, 2021, for a limit of $10,000 per employee for any quarter in 2021.
For many years, Horizon Payroll has been helping businesses of every size navigate their tax compliance and payroll decisions. Payroll taxes, business entitlements, and shifting IRS policies and laws can be challenging to stay on top of, which is why our clients trust us to help ensure they earn every penny they deserve while steering clear of potentially costly tax errors.
In our years of doing business, we’ve established a reputation for providing top-rated solutions for companies both large and small. From standard processes like payroll processing to complex tax compliance questions, our goal is to be a trusted resource that can help provide both peace of mind and tangible results! Contact us today for a consultation.
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Employee retention credits are relatively new and complex. Multiple laws have been passed since their initial induction, which can make it difficult to tell what information is current and what facts may be out of date.
Our team of experts can help you determine if your business is eligible for ERCs and get you started down the path to earning what you’re entitled to.
To learn more about how Horizon Payroll can help your business navigate the busy world of payroll, contact our top-rated team today for a free consultation. Whether you’re looking to modernize your company’s payroll process or you're curious about what corporate tax benefits your business could be missing out on, we’re here to help!
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