Introduction to Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) is a tax credit that helps small businesses keep their employees on payroll during the COVID-19 pandemic. The ERC was introduced as part of the CARES Act in March 2020 and was extended and expanded by the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in March 2021.
Key Takeaways from ERC Introduction
The ERC is a refundable tax credit that can be claimed by eligible employers on their federal employment taxes.
The ERC can provide up to $26,000 per employee for 2020 and 2021 combined, depending on the amount of qualified wages paid and the calendar quarter.
The ERC is available to employers who experienced a significant decline in gross receipts or a full or partial suspension of operations due to a government order related to COVID-19.
The ERC is also available to certain recovery startup businesses that began operations after February 15, 2020 and have annual gross receipts of less than $1 million.
Key Features of ERC
The ERC is calculated as a percentage of qualified wages paid to eligible employees, up to a maximum amount per employee per calendar quarter. The percentage and the maximum amount vary depending on the year and the quarter.
The ERC is refundable, which means that if the amount of the credit exceeds the employer's federal employment tax liability, the excess amount will be refunded to the employer. This means that even employers who have no income tax liability can benefit from the ERC.
Eligibility Criteria for ERC
The eligibility criteria for the ERC depend on the size of the employer, the impact of COVID-19 on the employer's business, and the type of the employer's business.
Criteria for Small Businesses
For 2020, a small business is defined as an employer that had an average of 100 or fewer full-time employees in 2019. For 2021, the threshold is increased to 500 or fewer full-time employees.
A small business is eligible for the ERC if it meets one of the following conditions:
It experienced a full or partial suspension of operations due to a government order related to COVID-19, such as a lockdown, a curfew, or a capacity limit.
It experienced a significant decline in gross receipts compared to the same quarter in 2019. A significant decline is defined as a drop of more than 50% for 2020 and more than 20% for 2021.
A small business can claim the ERC for all qualified wages paid to its employees, regardless of whether they worked or not, during the period of eligibility.
Criteria for Large Businesses
For 2020, a large business is defined as an employer that had an average of more than 100 full-time employees in 2019. For 2021, the threshold is increased to more than 500 full-time employees.
A large business is eligible for the ERC if it meets one of the following conditions:
It experienced a full or partial suspension of operations due to a government order related to COVID-19, such as a lockdown, a curfew, or a capacity limit.
It experienced a significant decline in gross receipts compared to the same quarter in 2019. A significant decline is defined as a drop of more than 50% for 2020 and more than 20% for 2021.
A large business can claim the ERC only for qualified wages paid to its employees who did not work, or worked reduced hours, during the period of eligibility.
Criteria for Recovery Startup Businesses
A recovery startup business is a new type of eligible employer that was added by the American Rescue Plan Act for the third and fourth quarters of 2021. A recovery startup business is defined as an employer that:
Began operations after February 15, 2020.
Has annual gross receipts of less than $1 million.
Is not otherwise eligible for the ERC based on the criteria for small or large businesses.
A recovery startup business can claim the ERC for up to $50,000 per quarter, regardless of the amount of qualified wages paid to its employees.
Understanding Qualified Wages
Qualified wages are the wages and compensation paid by an eligible employer to an eligible employee during the period of eligibility. Qualified wages include salaries, wages, tips, commissions, bonuses, and other forms of compensation. Qualified wages also include the employer's share of health plan expenses paid on behalf of the employee.
The amount of qualified wages that can be claimed for the ERC depends on the size of the employer and the year.
For 2020, a small employer can claim up to $10,000 of qualified wages per employee for the entire year, while a large employer can claim up to $10,000 of qualified wages per employee for each quarter of eligibility.
For 2021, both small and large employers can claim up to $10,000 of qualified wages per employee for each quarter of eligibility.
The definition of qualified wages also varies based on the size of the employer and the year.
For 2020, a small employer can claim qualified wages for all employees, regardless of whether they worked or not, while a large employer can claim qualified wages only for employees who did not work, or worked reduced hours, due to COVID-19.
For 2021, both small and large employers can claim qualified wages for all employees, regardless of whether they worked or not, as long as the employer meets the criteria for a full or partial suspension of operations or a significant decline in gross receipts.
Qualified wages include the wages paid to part-time employees, as well as the wages paid to employees who are related to the employer, such as family members or owners, as long as they are not more than 50% owners of the business.
Applying for ERC
The process for applying for the ERC is relatively simple, but it requires the employer to consult a tax professional and to keep accurate records of the wages paid and the eligibility criteria met.
The employer can claim the ERC by filing Form 941, Employer's Quarterly Federal Tax Return, or by adjusting a previously filed Form 941. The employer can also request an advance payment of the ERC by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19, if the employer does not have enough federal employment taxes to cover the amount of the credit.
The employer can file retroactive claims for the ERC for any eligible quarter in 2020 or 2021, as long as the statute of limitations has not expired. The statute of limitations is generally three years from the date the original Form 941 was filed or two years from the date the tax was paid, whichever is later.
The employer must keep documentation to support the eligibility for the ERC, such as records of the government orders that affected the operations, the gross receipts for each quarter, the qualified wages paid to each employee, and the health plan expenses paid on behalf of the employees. The employer must also keep records of the calculations and the forms filed to claim the ERC.
The employer may use a professional employer organization (PEO) or a certified professional employer organization (CPEO) to report and pay federal employment taxes on behalf of the employer. In that case, the employer must provide the PEO or CPEO with the information necessary to claim the ERC, such as the eligibility criteria and the qualified wages. The PEO or CPEO will then file the appropriate forms and claim the ERC on behalf of the employer.
ERC and PPP Loans
The ERC and the PPP (Paycheck Protection Program) loans are two separate programs that provide relief to small businesses affected by COVID-19. However, they interact in some ways that the employer should be aware of.
The employer can benefit from both the ERC and the PPP loans, as long as the same wages are not used for both programs. In other words, the employer cannot claim the ERC for the wages that are used for PPP loan forgiveness.
The employer can claim the ERC for the wages that are not used for PPP loan forgiveness, or for the wages that are paid after the PPP loan is forgiven or repaid.
The employer can also claim the ERC for the wages that are paid before receiving the PPP loan, or for the wages that are paid after returning the PPP loan.
The employer must reduce the amount of qualified wages for the ERC by the amount of any qualified sick and family leave wages that are claimed under the Families First Coronavirus Response Act (FFCRA).
Additional Considerations
The ERC is a valuable opportunity for small businesses to reduce their tax liability and to retain their employees during the COVID-19 crisis. However, there are some additional considerations that the employer should keep in mind.
The ERC is subject to a moratorium on new claims for the third and fourth quarters of 2021, unless Congress extends the program. This means that the employer cannot claim the ERC for any wages paid after September 30, 2021, unless the employer is a recovery startup business or a severely financially distressed employer.
The deadline for filing claims for the ERC is the same as the deadline for filing Form 941, which is generally the last day of the month, or the next business day if the last day falls on a weekend or a holiday. The employer should file the claims as soon as possible to receive the refund faster.
The ERC is non-repayable, which means that the employer does not have to pay back the credit, even if the business recovers from the COVID-19 crisis. However, the employer should be aware that the ERC may affect the employer's taxable income and deductions, and the employer should consult a tax professional for guidance.
Common Questions About ERC
Here are some of the common questions that employers may have about the ERC and their answers:
What is an ERTC loan? An ERTC loan is a type of loan that allows the employer to access the ERC funds faster, without waiting for the refund from the IRS. An ERTC loan is offered by some lenders, such as Swift SBF, who specialize in providing financing solutions for small businesses. An ERTC loan is based on the estimated amount of the ERC that the employer is eligible for, and it is repaid by the refund from the IRS once the employer files the claim for the ERC.
Can I get a loan on my ERC? Yes, you can get a loan on your ERC if you need immediate cash flow for your business. You can apply for an ERTC loan from a lender like Swift SBF, who can provide you with up to 90% of your estimated ERC amount within 24 hours. You can use the ERTC loan for any business purpose, such as payroll, rent, inventory, or debt payments. You can repay the ERTC loan with the refund from the IRS once you file your ERC claim, or with your own funds if you prefer.
Who is eligible for ERC loan? Any employer who is eligible for the ERC is also eligible for an ERTC loan, as long as the employer meets the lender's requirements. The lender may ask for some information and documentation to verify the employer's eligibility for the ERC, such as the employer's tax returns, payroll reports, bank statements, and proof of COVID-19 impact. The lender may also perform a credit check and a lien search on the employer's business.
Does ERTC credit have to be paid back? No, the ERTC credit does not have to be paid back, as it is a tax credit that reduces the employer's federal employment tax liability. However, the ERTC loan, which is a separate product that allows the employer to access the ERTC credit faster, does have to be paid back, either with the refund from the IRS or with the employer's own funds. The ERTC loan is typically a short-term loan with a low interest rate and no prepayment penalty.
What disqualifies you from ERC? There are some factors that may disqualify you from ERC, such as:
Claiming the same wages for both the ERC and the PPP loan forgiveness.
Claiming the ERC for wages that are not qualified wages, such as wages that exceed the maximum amount per employee per quarter, wages that are paid to more than 50% owners of the business, or wages that are not related to COVID-19 impact.
Failing to meet the eligibility criteria for the ERC, such as the criteria for a full or partial suspension of operations, a significant decline in gross receipts, or a recovery startup business.
Missing the deadline for filing the ERC claim, or filing an incomplete or inaccurate claim.
Not keeping adequate records to support the ERC claim, or not providing the required information and documentation to the IRS or the lender.
How long does it take to get your money back from ERTC? The time it takes to get your money back from ERTC depends on how you claim the ERTC and how you receive the refund from the IRS. If you claim the ERTC by filing Form 941, you can expect to receive the refund within 6 to 8 weeks after filing the form. If you claim the ERTC by adjusting a previously filed Form 941, you can expect to receive the refund within 2 to 4 weeks after filing the adjustment. If you request an advance payment of the ERTC by filing Form 7200, you can expect to receive the refund within 2 weeks after filing the form. However, these are only estimates, and the actual time may vary depending on the IRS processing time and the method of payment. If you need the ERTC funds faster, you can apply for an ERTC loan from a lender like Swift SBF, who can provide you with the funds within 24 hours after approval.
Conclusion
The Employee Retention Credit (ERC) is a valuable opportunity for small businesses to reduce their tax liability and to retain their employees during the COVID-19 crisis. The ERC can provide up to $33,000 per employee for 2020 and 2021 combined, depending on the amount of qualified wages paid and the calendar quarter. The ERC is available to employers who experienced a full or partial suspension of operations or a significant decline in gross receipts due to COVID-19, as well as to certain recovery startup businesses. The ERC is refundable and non-repayable, which means that the employer can receive the excess amount of the credit as a cash refund and does not have to pay back the credit. The employer can claim the ERC by filing or adjusting Form 941, or by requesting an advance payment by filing Form 7200. The employer can also apply for an ERTC loan from a lender like Swift SBF, who can provide the employer with up to 75% of the estimated ERC amount within 24 hours. The employer should consult a tax professional and keep accurate records to ensure the eligibility and compliance for the ERC. The employer should also act fast, as the ERC is subject to a moratorium on new claims for the third and fourth quarters of 2021, unless Congress extends the program. The ERC is a great way for small businesses to survive and thrive in these challenging times.
