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Employee Retention Credits Guide
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.
How Employee Retention Credits Work
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.
Does My Business Qualify for an ERC?
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.
Can My Business Claim an ERC Retroactively?
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.
Determining Your Eligibility for an Employee Retention Credit
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.
Horizon is a Trusted Partner for Payroll/Tax Compliance
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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