The Employee Retention Credit (ERC) is an invaluable tax credit that was introduced as part of the popular CARES Act in March 2020. It was designed to assist eligible businesses financially during COVID-19. The ERC has undergone several changes and extensions since its inception, making it crucial for business owners and employers to stay informed about its provisions.
This piece will explore the ERC tax credit in detail, covering its eligibility criteria, calculation methods, recent updates, and potential business benefits.
Understanding the Employee Retention Credit
Let’s dive right in and learn more about the Employee Retention Credit.
Purpose and Background
The ERC was created to incentivize businesses rather than have them to fire employees during economic uncertainty caused by the pandemic. It aims to provide financial relief by offering eligible employers a refundable tax credit based on qualified wages paid to their employees.
To qualify for the ERC, businesses must meet specific criteria, including:
Business operations: The business must have experienced partial or total suspension of operations due to government orders related to the pandemic or have had to deal with a significant decline in gross earnings.
Size of the business: The ERC is available to companies of all sizes, including organizations exempt from paying taxes and government entities. However, different rules apply to employers with more than 500 employees.
Qualified Wages and Credit Calculation
The ERC is determined depending on the wages paid to eligible workers during specific timelines. The amount equals a percentage (typically 50% or 70%) of qualified wages, with a maximum limit per employee per quarter. Qualified wages may include salaries and certain health plan expenses the employer pays.
ERC Updates and Extensions
Initially, the ERC was available for wages paid between March 13, 2020, and December 31, 2020. The credit was capped at $5,000 per employee for the entire year.
Consolidated Appropriations Act (CAA)
The CAA was signed into law in December 2020, allowing the ERC’s extension and expansion. Key changes included:
Extension of the credit: The ERC was extended to 30th June 2021.
Increased credit amount: The percentage of qualified wages eligible for the credit was increased to 70%, up from 50%. The maximum credit per employee per quarter was raised to $7,000.
American Rescue Plan Act (ARPA)
The ARPA, enacted in March 2021, brought additional changes to the ERC, such as:
Further extension of the credit: The ERC was extended for wages paid from July 1, 2021, to December 31, 2021.
New eligibility criteria: Starting July 1, 2021, businesses that experienced a sharp decline of more than 20% in gross receipts compared to the same quarter in 2019 could qualify for the credit.
Benefits and Potential Impacts
Financial Relief for Businesses
The ERC provides significant financial relief to eligible businesses by reducing their tax liability. The refundable nature of the credit allows businesses to receive the refund if their credit amount exceeds their tax liability.
Employee Retention and Business Continuity
The credit incentivizes employers to retain their employees, promoting stability and continuity in their workforce. The ERC helps businesses avoid layoffs and maintain their operations during challenging times by providing financial assistance.
Integration with Other Relief Programs
Businesses can combine the ERC with other relief programs, such as the Paycheck Protection Program (PPP).
Is the ERC Still Available in 2023?
While the ERC ended in 2021, small businesses meeting the eligibility criteria can apply for ERC credit in 2023.
If a business didn’t claim the credit before (in 2020 and 2021), it could use the IRS Form 941-X to fill out an amended quarterly tax return necessary to make a claim. When the form is filled for all quarters, the IRS is responsible for processing the returns and issuing a refund through the check method.
ERC Deadline For the Qualifying Period in 2020
Businesses that still need to file claims on their 2020 quarterly tax returns have the opportunity to fill Form 941-X. For the 2020 ERC, businesses have until 15th April 2024 to submit the claims.
The qualifying period 2020 counts from 13th March 2020 to 31st December 2020. Any business that paid workers during this period could be eligible for a credit claim of up to $5,000 for every worker.
ERC Deadline For the Qualifying Period in 2021
If a business didn’t claim credits in quarterly tax returns in 2021, they could file amended returns to get the credit as a refund. They have until 15th April 2025 to make claims for 2021 ERC.
For 2021 ERC, the qualifying period is 1st January 2021 to 20th September 2021.
Necessary Steps to Take
Businesses should follow a few essential steps to make the most of the ERC tax credit. First and foremost, they should evaluate their eligibility based on the criteria set forth by the IRS. This involves assessing the decline in gross receipts and understanding the impact of government orders on their operations.
Once eligibility is established, businesses should work closely with their tax advisors to calculate the credit accurately. Gathering all necessary documentation and maintaining detailed records is crucial to support the claim and ensure compliance with IRS guidelines.
The Bottom Line
As the ERC tax credit deadline approaches, businesses must proactively. The ERC refund processing time is different from business to business so you should apply as soon as possible without delay. Some businesses have reported receiving their refund in as little as 4-6 weeks, while other businesses have said it’s taken as long as nine months.
Because of this wide range, you should consult with a tax advisor or ERC specialist right away. Unless you are an accountant, CPA, or tax specialist yourself, I would not advise to filing for ERC on your own. It’s a special and new process that should be taken seriously with the help of a specialist.