Employee Retention Tax Credits: What Business Owners Need to Know
During the height of the COVID-19 pandemic, the U.S. government introduced several pieces of legislation to help employers weather the storm. One of these measures was the Employee Retention Credit (ERC), which was a tax credit designed to encourage businesses to retain employees during those challenging times.
Although the ERC only applies to wages paid before January 1, 2022, qualified business owners who have not yet received their tax credits can still claim them. Keep reading to learn the basics of the ERC and find out what business owners need to know in order to take advantage of this valuable resource.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a tax credit offered by the U.S. government to encourage businesses to retain their employees during the COVID-19 pandemic. The credit was first introduced under the CARES Act in March 2020, and it was extended and expanded multiple times under subsequent legislation.
The ERC provides eligible employers a tax credit for qualified wages paid between March 13, 2020 and December 31, 2021. However, it should be noted that only “recovery startup businesses” are eligible to receive a credit for wages paid between October 1 and December 31 of 2021.
While credit amounts vary based on the calendar quarter in which the wages were paid, the ERC allows employers to claim credits up to 70% of qualified wages paid to employees for a maximum credit of $7,000 per employee per quarter.
Who Qualifies for Employee Retention Credits?
To qualify for an Employee Retention Credit, an employer must meet one of the following eligibility criteria:
The employer fully or partially suspended operations to comply with orders from a governmental authority that limited commerce, travel, or group meetings in 2020 or during the first three quarters of 2021
The employer experienced a significant decline in gross receipts in 2020
The employer experienced a decline in gross receipts during the first three quarters of 2021
The employer qualified as a recovery startup business during the third or fourth quarters of 2021
A “recovery startup business” is defined as an employer that does not meet the other eligibility criteria, started doing business after February 15, 2020, and had average annual gross receipts under $1,000,000 for the three taxable years prior to the quarter for which the tax credit is claimed.
Large vs. Small Employers
While the number of employees a business has does not directly impact eligibility for the ERC, it does affect the type of wages that are “qualified” for a tax credit.
Under ERC legislation for wages paid in 2020, employers that had more than 100 full-time employees in 2019 can only receive a tax credit for wages paid to employees who were not providing any services. The same limitation applies to wages paid in 2021 by businesses that had more than 500 full-time employees in 2019.
On the other hand, “small” employers can claim the tax credit for all wages paid to employees, regardless of whether or not they actually provided services. For wages paid in 2020, small employers include businesses that had fewer than 100 employees in 2019, and for wages paid in 2021, small employers are those that had fewer than 500 employees in 2019.
How To Apply for an Employee Retention Tax Credit for Your Business
Even though the ERC only applies to wages paid in 2020 and 2021, business owners can still claim their credits. Assuming you have already filed your quarterly tax returns, you can file a Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund). This allows you to amend your quarterly tax returns and claim the ERC tax credit.
However, it’s important to note that eligibility for the ERC is complex and varies depending on the financial quarter in question. We suggest discussing the details with a qualified business attorney before you file.
An attorney can help you understand the requirements involved and ensure you take advantage of all available credits. Plus, a lawyer can also help you avoid costly penalties or interest charges that may accrue due to mistakenly claiming an Employee Retention Credit that you may not be legally entitled to receive.