Introduced through the Coronavirus Aid, Relief and Economic Security (CARES) Act, the Employee Retention Tax Credit was established to encourage eligible employers to keep their employees on the payroll during the COVID-19 outbreak. It’s a refundable and non-refundable tax credit that businesses can claim on qualified wages, including some health insurance costs, paid to employees.

Under the CARES Act of 2020, businesses may be eligible for the ERC if they have employees and operate a trade or business, which includes tax-exempt organizations. However, with limited exceptions, it does not apply to governments or their agencies and instrumentalities. A small eligible employer for 2020 is an employer that had 100 or fewer full-time (30 hours per week or more) employees on average per month in 2019, and for 2021 had 500 or fewer full-time employees on average per month in 2019.

Your business might be eligible for the ERC if its operations were fully or partially suspended by governmental COVID-19 orders limiting commerce, travel or group meetings or experienced a significant decline in gross receipts during 2020 or the first three quarters of 2021. If your business started to operate on or after February 15, 2020, it might qualify to claim the ERC for the third or fourth quarters of 2021 as a recovery startup business.

In general, ERC-qualified wages include those paid by employers to employees while operations were fully or partially suspended by governmental COVID-19 orders or the business experienced a decline in gross receipts. What’s covered? Cash wages, both hourly and salaried, along with vacation pay and any other taxable wages. Qualified wages under the ERC program also include certain health plan expenses that are allocable to those wages.

Qualified wages under the ERC program are limited to the first $10,000 of compensation paid to any employee during a calendar year (2020) or calendar quarter (2021) and can be claimed for wages paid or incurred from March 13, 2020, through June 30, 2021.

Here’s a year-by-year breakdown of what the employee retention credit offers to eligible employers:

• 2020 ERC: A credit against certain payroll taxes of 50% of the wages paid — up to $10k per employee — from March 12 – December 31, 2020 (capped at $5k per employee).
• 2021 ERC: A quarterly tax credit of 70% of the first $10,000 in wages per employee in each quarter of 2021 from January to September 2021 (capped at $7K per employee per quarter).

An employer had a significant decline in gross receipts in 2020 during the first calendar quarter, for which gross receipts for that quarter were less than 50% of those for the same calendar quarter in 2019.

An employer had a significant decline in gross receipts in 2021 during the first calendar quarter, for which gross receipts for that quarter were less than 80% of those for the same calendar quarter in 2019.

You can calculate your ERC based on total qualified wages. Those wages include health plan expenses paid by your employees. This calculation varies based on the number of employees your business had in 2020 and 2021 and other factors, such as wages paid with PPP loans or wages paid to owners and their relatives.

The ERC equals 50% of the qualified wages for 2020 and 70% for 2021. Note that the maximum credit amount for 2020 is $5,000 per employee for the calendar year, and for 2021 is $7,000 per employee per quarter.

According to Section 4980H of the Internal Revenue Code, an FTE is someone who works an average of at least 30 hours per week or 130 hours per month.

Under the CARES Act, a tax-exempt business is considered eligible for the ERC if it passes either the Gross Receipts Test (GRT) or the Government Orders Test (GOT). You do not have to pass both tests to qualify.

Yes. A recovery startup business can claim the ERC for wages paid after June 30, 2021, and before January 1, 2022. According to the American Rescue Plan Act, this type of business is eligible for the ERC if it started on or after February 15, 2020, employs one or more W2 workers (not including owner-operators or family members) and has annual gross receipts that do not exceed $1 million for the individual 2020 and 2021 tax years.

No, your ERC is not a loan and does not have repayment terms. Why? Because it’s a refundable tax credit for businesses.

Employers who received the ERC for 2020 or 2021 or both, however, must amend their corporate income tax returns (and personal returns if a corporation is a pass-through entity) for the relevant years.

Although the ERC program has already ended, an eligible employer still has time to claim the employee retention credit by filing a Form 941X for relevant quarters. For all four quarters in 2020, the deadline to apply is April 15, 2024; for all quarters in 2021, the deadline is April 15, 2025.

Eligible businesses can retroactively claim the ERC for 2020 and 2021 by filing IRS Form 941-X to amend their filed returns (Form 941) for the quarters during which your business was an eligible employer.  It is important to ensure that your Form 941 for 2020 and 2021 were filed, received, and processed by the IRS prior to filing Form 941X.  Unlike Form 941, Form 941X cannot be filed electronically.  Before you claim the credit, make sure you’re equipped with the following information:  

• Payroll data
• Personal information (including Employer Identification Number)
• Prior years’ tax returns
• Copies of Form 941 filed for each quarter you plan to claim the ERC

The ERC is a non-refundable and refundable tax credit that eligible employers claim against employment taxes for 2020 and 2021. Generally, a business must claim the credit on either Form 941 (uncommon) or by filing a Form 941X after filing Form 941 (common). After the IRS receives either Form 941 or Form 941X, it assigns the form to a processor. After the credit is processed, the IRS will send the company a CP 210 notice that details the credit amount plus interest and then sends a paper check for the refund amount via USPS to the company’s address of record with the IRS.

To check on the status of your claim, call the IRS helpline at (800) 829-4933, or visit the agency’s website. Have your employer ID number, Social Security number and tax return information readily available.

This varies, but it typically takes the IRS between 4 and 12 months to issue ERC refunds. Generally, smaller refunds (under $80K per quarter) process faster than larger refunds (over $80K per quarter).

Previously, businesses that received a Paycheck Protection Program (PPP) loan weren’t eligible for an employee retention credit. However, through the Consolidated Appropriations Act of 2021, eligible businesses that received a PPP loan can now apply for the ERC — retroactively to 2020. Note that you cannot claim the ERC for wages that were paid with funds from a PPP loan that was forgiven.

The Paycheck Protection Program (PPP), which ended on May 31, 2021, was a forgivable loan. It provided small businesses with funds to pay up to eight weeks of payroll costs, including benefits. Funds from the PPP loan also could be used by those businesses to pay interest on mortgages, rent and utilities.

The ERC is a tax credit established to encourage eligible employers to keep their employees on the payroll during the COVID-19 outbreak. It’s a refundable and non-refundable credit that businesses can claim on qualified wages, including some health insurance costs, paid to employees.

The U.S. federal government established the ERC program under the Coronavirus Aid, Relief and Economic Security (CARES) Act. The CARES Act was passed by Congress on March 25, 2020, and signed into law on March 27, 2020. Subsequent federal legislation amended and extended the program through September 30, 2021, for most eligible employers and through December 31, 2022, for recovery startup businesses. The ERC is administered by the IRS.

Signed into law on March 11, 2021, the American Rescue Plan extended the availability of the employee retention credit for small businesses through December 2021, but subsequent legislation ended the program for most eligible employers on September 30, 2021. It also increased the credit limit for 2021 to a maximum of $7,000 per employee per quarter.

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