How To Qualify For The Employee Tax Retention Credit

What is the Employee Retention Credit (ERC)?

ERC is a program offered by the federal government in 2020 at the beginning of the pandemic to employers whose businesses were affected by Covid 19 pandemic and kept their employees on the payroll.

At the time it was introduced, the tax credit was equivalent to 50% of the equivalent employee’s total wage. However, the credit was limited to $10,000 per employee for the entire year. So the maximum amount you could get was $5000 for all the salaries paid during that covid period, March to December 2020.

Later on, the act was amended, and the wage limit increased from 50% to 70% for qualified wages as well as, instead of the limit being calculated by the full year, the limit was now calculated per quarter. So the maximum you could get was $28,000 per employee for all salaries paid during 2021.

The government yet again made another amendment to the ERC program in November of 2021, but this time it was a reduction! The government removed Q4 of 2021. So the maximum you could get, as of the time of this article, $21,000 per employee for all salaries paid during 2021.

Is the credit available to any business regardless of how many employees they have, so long as they pay the qualified employee wages? In 2020, there was a cap of 100 employees which was raised in 2021 to 500 employees.

Which begs our next question, who qualifies for the credit?



Who is eligible for the Employee Retention Credit?

Eligible businesses include:

  • All private-sector employers; and
  • Tax-exempt organizations
  • There are 3 main conditions to qualify;
    • Government Order: If, your business was impacted due to government orders, directly and on a case by case basis, indirectly impacted.
    • Revenue Drop: Your gross revenues declined in comparison to 2019
    • Recovery Start up: If your business started after February 15, 2020

What constitutes a partial suspension of business operations?

For your business to qualify as partially suspended, its operations must have been cut short because of federal, state, or local government’s order, decree, or proclamation. And the order directly affected your everyday operations

For example, let’s say you are a restaurant owner. And when the pandemic broke out, the local government issued you an order to close your dining room. However, they let you continue with the delivery or carry-out services. In this case, your business will be considered to have partially suspended operations.

In order to apply partial suspension of business operations could happen because the order issued by authorities had cut the number of hours a business could be open, or some of the business operations had to be shut down, and the work could not be done remotely.

How do I calculate the Employee Retention Credit?

To calculate your ERC precisely, you first have to determine the period your business was affected. The Employee Retention Credit is 50% of the qualified wages paid in the calendar quarter of 2020 and 70% of the qualified wages paid in the same duration in 2021.

The businesses that qualify for the credit are those paid employee wages after March 15 2020 and before January 1 in 2021. And the maximum eligible wage is $10,000 for each employee. Meaning, for 2020 ERC is $5000 per employee, per year, and $7000 per employee, per quarter in 2021.

How do you claim for ERC?

At this point in time as of the writing of this article, you can only claim ERC by filing an amendment to your original 2020 & 2021 941’s. Be careful of outdated information in the market. You could technically file this yourself, but do you want to do it the hard and potentially wrong way or easy and right way?

Suppose you forgot or filed the wrong tax credit form. You can still access the tax credit. What do you do?

There are a number of options access your credit. And although the forms are much similar, you’ll be required to explain why you delayed.

To be considered you need to use a separate form 941-X per every business quarter that you adjust or correct.

Lastly, don’t forget to check whether you meet all the eligibility criteria before finally submitting the form.

Can You Get the Employee Retention Credit (ERC) and Paycheck Protection Program(PPP)?

Previously, employers with Paycheck Protection Program (PPP) were not entitled to ERC. However, with the enactment of section 206(c)Taxpayer Certainty and Disaster Tax Relief of 2020, businesses could qualify for PPP and ERC if;

  • The PPP loan is dissociated from the business’ qualifying wages
  • One member of the business requests for PPP while the other seeks ERC
  • The business gets qualifying wages with the profits from a forgiven PPP that is not similar to the ERC qualifying wages

The amount you can get is limited based on the above criteria.

What is the Maximum Period Before I Receive my ERC?

The whole process may take about 3 to 4 months currently for you to receive your funding as of the writing of this article. This is because it involves various factors which must be carefully considered by the relevant authorities to finalize the claim. You can check the status of your claim through the dedicated IRS customer services desk which will help you immediately.

To check your refund status visit the official IRS website and go to the reports section. Open and scroll to payroll Tax Reports. You’ll find all the information about your ERC status and other details like the amount of the ERC and the duration.

Seek a Helping Hand to Walk With You

As an eligible business owner, there is no easy way to get your refund. Work closely with a qualified business funding specialist to check if you pre-qualify and navigate through.

This will help get things done and offer a professional analysis of your eligibility. Such will advise how to prepare form 941-X properly and understand the set rules.