The Coronovirus Aid, Relief, and Economic Security (CARES) Act contains a business relief provision known as the Employee Retention Credit (ERC), a refundable payroll tax credit that was designed to encourage employers to keep employees on the payroll, even if they were not working, during COVID-19.
The ERC was further expanded under the Consolidated Appropriations Act, 2021 (CAA) and the American Rescue Plan Act, allowing for those who received PPP loans to claim ERC and allowing certain startup businesses to qualify for assistance.
We never predicted we'd still be working to claim ERC this late in 2022…but here we are. ERC has become a big benefit to many of our clients the last few years, but we’re still puzzled by the fact that so many business owners that qualified may not have applied for or received their credit and many folks don’t realize ERC exists. With that said, there are some steps you and your business will have to take before you take advantage of the ERC. Here’s what you need to know.
This was such a big topic that we wrote a blog about the Employee Retention Credit last year. Basically, while it started during Hurricane Katrina, ERC is a payroll tax credit that was modified in 2020 for business owners who kept their employees on payroll during the pandemic. Business owners qualify based on a reduction in their gross receipts OR if the business was restricted because of government orders (think restaurants during the pandemic shutdown).
It’s potentially worth a substantial amount of money: an employee that was employed by you through 2020 and 2021 could generate up to $26k in credits. In 2020, it was worth 50% of qualified wages, up to a $5k credit per employee. In 2021, that jumps to 70% for up to $7k per employee, per quarter, through the third quarter.
If your business operations were either fully or partially suspended due to a COVID-19-related governmental order, or if you experienced a significant reduction in gross receipts, you may qualify for the employee retention credit.
An example of a business that qualifies due to operating under a government order is a restaurant in which the dining room was fully closed or capacity-limited to comply with an order issued by the state or county in which they operate.
To qualify based on a reduction of gross receipts, you need to compare quarterly revenues from 2020 and 2021 to the corresponding quarters in 2019. To qualify in 2020, you would have to have had a 50% reduction compared to 2019, while in 2021, that amount was 20%.
It’s worth checking to see if you qualify, as many businesses who didn’t in the past, now do. In early 2020 you couldn’t take advantage of the ERC if you received PPP money, but by the end of that year the legislation changed.
Some new businesses that started during the pandemic may also qualify for the ERC as a recovery startup business, under the American Rescue Plan Act.
At this time, to claim an ERC, you will need to file an amended 941 (otherwise referred to as 941-x) for each quarter in which you would like to claim the credit. But first, once you’ve confirmed when you have qualified, you will need to do some complex calculations. The ERC requires you to calculate qualified wages – wages that are eligible for the ERC. If you receive forgiveness for a Paycheck Protection Plan (PPP), have multiple related companies or family members in the business, it becomes significantly more complicated to maximize your benefit.
Beyond that, you’re going to need to amend your 2020 & 2021 income tax returns depending on the quarters in which you qualify. That is because you must reduce your labor expense in the year that you’re claiming the credit for, for the amount of the credit. Depending on the type of business you have, that can be a LOT of paperwork. For example if you have an S-corp or partnership, you’ll have at least two amended returns that you’ll need to get in order if you file for an ERC.
Unfortunately, since an amended 941 cannot be e-filed, you must mail in the form. The IRS is historically behind in processing amendments, and we have seen over 18 month wait times to get these credits processed. Fortunately, we were ahead of the curve when they updated the qualifications, and many of our clients were able to claim the credit on their originally filed 941, resulting in generally a 30-60 day return of the credits. We proactively reviewed our clients financial trends and categorized their industries to anticipate qualifying in a short order.
Fortunately, if you didn’t receive an Employee Retention Credit, but believe you qualify, you can file a 941-x up to three years after the original due date and still receive the credit.
Since this has become such a boon to a lot of companies (after all, how often do you GET checks from the government?), it’s become big business to help folks file their ERC, to the point that there are companies who ONLY do this. Are they a good idea? Maybe, but it’s best to go in with open eyes. After all, there are risks here.
What are the risks? Well, payroll taxes pierce the corporate veil, and most of these ERC companies aren’t doing that hard work. They’ll be telling your payroll company or whoever does your taxes to amend it. That extra step can cause a lot of headaches if you don’t have clear communication between your payroll team and the ERC company. That’s why we recommend using an accounting firm that takes a comprehensive approach to your business.
Well, first of all, you’ll want tax professionals with the experience to guide you through this process. We’ve helped tons of our clients claim ERC for their small businesses, saving them millions of dollars in taxes. Want to learn more? We’d love to talk to you about it.