What is the Employee Retention Tax Credit: ERC Explained!

Learn the true facts! Any eligible employer who paid qualified wages to W-2 employees during COVID-19 can claim the employee retention credit. Many changes were made to ERC eligibility in the Disaster Tax Relief Act. Now almost everyone can qualify for this fully refundable tax credit, including recovery startup businesses, companies that received Paycheck Protection Program loans, and those that did not experience a significant decline in gross receipts.

What is the ERTC?

How does the Employee Retention Credit work? It started as a government incentive program to encourage employers to retain W-2 employees during the COVID-19 pandemic, so they would continue to pay social security taxes and related health insurance costs.

When it originally appeared in Coronavirus Aid, Relief, and Economic Security Act, the main requirement to receive this refundable payroll tax credit was a 50% drop in 2020 revenues filed in quarterly employment tax returns. All qualified employee wages paid during the last three quarters of 2020 (April through December)were eligible for a 50% refund up to a maximum credit of $5,000 per W2 employee, per quarter.

If you take our simple 5-minute ERC Quiz you will instantly know if you are eligible for a 2020 or 2021 payroll retention tax credit refund, or as a recovery startup business. The IRS estimates that 70-80% of all US businesses will qualify for a refund after new legislation was added to include:

• Non-profit organizations and companies that received PPP loan forgiveness
• Businesses that turned a profit during the pandemic qualifying alongside those who had a 20% decline in annual gross receipts..

CARES Extended

After the Consolidated Appropriations Act, modifications were made to CARES Act. This allowed a non-profit business to qualify for the ERC even if they are classified as a tax-exempt organization.

The second modification allowed all employers who received a PPP loan forgiveness to also qualify for an employee retention credit. As long as the federal employment taxes and qualified health plan expenses they paid were greater than the loan amount, they could get an ERC refund.

ARP Extended

The ERTC was then further extended and edited in The American Rescue Plan Act (ARP) during the passing of the Infrastructure Investment and Jobs Act. In this amendment, employers who were able to pay qualified wages during the first three quarters in 2021 (January through September), could receive a refundable credit of 70% of qualifying, up to a maximum of $7,000 per employee, per quarter.

2022 Update

In total, an ERC refund can now be requested in 2022 for all qualifying wages paid over the six taxation quarters from April 2020 through September 2021. With a maximum credit of $5k per quarter in regards to 2020 wages and $7k per quarter for 2021 wages, eligible employers can receive up to $26,000 per W2 employee they retained during the eligibility period.

Eligibility

Significant updates were added to the Employee Retention Credit for all taxable income quarters in 2021. If your advisor once said you may not qualify, this may no longer be the case. So, don’t let rumors or misinformation guide you, and be sure to get a second opinion before you lose out on this fully refundable tax credit from the IRS.

Both essential and non-essential businesses in any industry and even tax-exempt organizations that were affected by the pandemic can qualify for an employee retention credit. From restaurants with restricted dining or stores with limited capacity to manufacturers having to meet new health and safety regulations, the IRS does not discriminate.

Even tax-exempt organizations and companies who had increased gross receipts or were deemed an essential business during the pandemic can still qualify for a refund. So, if your business was impacted by COVID in any way, shape, or form you are more likely to qualify than not.

You can use our free ERC Calculator to get a rough estimate of how big your refund check could be, if you could qualify each eligible employee for the ERC’s maximum credit rebate.

Qualifiers

The first step is qualification is that you must have been actively carrying on your trade or business during the calendar year of 2020 or 2021. The second step is that you must also then meet two of the following requirements:

• Full and partial shutdowns on government orders whether federal, state, or local
• Reduced gross receipts of at least 50% in any quarter of 2020
• Reduced gross receipts of at least 20% in any quarter of 2021, or a 20% decrease when compared to the same calendar quarter in 2019.

In regards to shutdowns, even if you were an essential business that had to stay open, as long as your business was affected by any of the following, you can still qualify.

• Limited operational capacity, reduction in goods or services offered
• Decreased hours of operation, or shifting hours to increase facility sanitation
• Inability to access equipment or work with your vendors
• Interrupted operations or supply chains

Advance Payments

During 2020 and 2021, you could receive an ERC advance payment by withholding Medicare taxes or employer’s employment tax deposits through Form 7220. Unfortunately, the last day to file an Advance Payment of Employer Credits Due to COVID-19 form was January 31, 2022, and the request advance payment form is no longer available on the IRS website.

Today, the only way to receive fast ERTC refunds is to take advantage of accounting firms that offer certain advance payments through escrow. Typically, they charge an upfront fee to process your ERTC application and then take a certain percentage of your refund after it gets released from escrow.

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Requirements

If you’ve already got through a PPP loan process, then you may already have most of the paperwork needed to apply for an ERC tax refund. Aside from that, there are just a few qualifications needed that can show your business was impacted and that you paid your W2 employee during this time.

Factors

Beyond the impact listed above, here are a few cut-and-dried qualifying factors that can ensure your Employee Retention Credit (ERC) application gets approved.

1. 50% drop in quarterly revenues in 2020
2. 20% drop in quarterly revenues in 2021
3. Numerous projects were delayed or canceled due to COVID-related disruptions
4. Production timelines were delayed by supply chain disruptions

Documents

To get your ERC refund application fast-tracked, you’ll need to prepare the following financial documentation. Once you have these items ready, the only thing that might stop you from obtaining your refund quickly is if you don’t use a Certified Professional Accountant (CPA) that specializes in ERTC refunds.

1. Quarterly financials for 2019, 2020, and 2021
2. Quarterly 941s for 2020 and 2021
3. Quarterly payroll costs and wage reports sorted by employee for 2020 and 2021
4. Quarterly health insurance premiums paid by the employer
5. PPP Loan Forgiveness Application (Form 3508) for any PPP loan(s) sorted by entity.
6. Ownership information to include the name of all owners and % ownership interest as well as any family members on the payroll
7. Any filed 941x amendments yet to claim ERTC from the prior quarter

If you leased employees from a PEO (Professional Employment Organization) you’ll require documentation that shows how many full-time, non-leased employees your company employed in 2019.

While the paperwork can be cumbersome, you must remember that Employee Retention Credit is a tax refund, not a loan. So, you will never have to pay it back and you can use the money any way you see fit.

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Employer Size

While at least one full-time employee being paid W-2 wages is required to claim the Employee Retention Tax Credit, the qualified wages eligible for a tax refund differ between small businesses and large companies.

By calculating the average number of full-time employees a company held in 2019, you can then determine which eligible wages paid can be claimed in your ERTC refund request. No calculation is required for part-time employees, as they do count against your small employer status.

Small Employer

To determine eligibility for the ERTC as a small employer for the 2020 claim, you must have averaged 100 or fewer employees that worked full-time in 2019. For a 2021 claim, companies with less than 500 or fewer full-time employees are also considered to be small employers.

• To claim the ERC in 2020 as a small employer you must not have averaged more than 100 full-time employees in 2019
• To claim the credit in 2021 as a small employer you must not have averaged more than 500 full-time employees in 2019

The qualified wages that small employers are allowed to claim, cover employee wages for those who were able to perform their duties, along with those who could not.

• All wages paid to employees providing services, and not providing services can be claimed by a small employer

Large Employer

If a company averaged more than 100 employees on a full-time basis in 2019 it would be considered a large employer when claiming a 2020 tax credit. Companies that employed more than 500 employees who worked full-time in 2019, would also be considered large employers for a 2021 claim.

• Any company that averaged 101 or more full-time employees in 2019 would be classified as a large employer for a 2020 ETRC claim
• Any company that averaged 501 or more full-time employees in 2019 would be classified as a large employer for a 2021 claim

If you have a large employer status for the ERTC 2019 reference period, only wages paid to employees who were unable to perform their duties can be claimed.

• Only wages paid to employees not providing services can be claimed by a small employer

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Recovery Startup Business

Any legal business entity that began operations on or after February 15, 2020, and paid qualifying wages to W-2 employees can claim employment tax credits due to covid-19. This is also regardless of whether or not they experienced a significant decline in gross annual receipts, or were fully or partially suspended in any calendar quarter.

These previously ineligible recovery startup businesses were only added to the ERC tax credit after the American Rescue Plan Act (ARS) was enacted. Now RSBs are eligible for the employee retention credit, as long as they had average annual gross receipts of less than $1,000,000.

This federal tax credit only applies to the third and fourth quarters of 2021 (Q3 and Q4). It has a maximum credit of $7,000 per employee. quarterly maximum of $50,000, a total maximum refund amount of $100,000.

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Refund Status

Unfortunately just being eligible for employee retention credit refunds will not speed up the Internal Revenue Service processing time. As of October 2022, we’re currently seeing clients receive their ERC refund checks within 6-9 months of their filing date. If you need to speed things up, there are some advance payment options now with a monthly interest rate of 1-2%.

Business owners can wait to have their payroll taxes refunded, the best way to perform an ERC status check is via the Where’s My Refund tool on the irs.gov website. This handy form can provide claim updates within 24-48 hours of electronically filing Form 941 or 941-x.

Another to check your employee retention credit refund status is to use the IRS2Go app which will ping updates straight to your phone. It’s not as effective as the tool above, but it’s less of a hassle.

Lastly, if you simply want to talk with an actual human being, you can also call the IRS on their toll-free hotline at 800-829-4933. The average hold time for early-day callers is currently 30 to 60 minutes.

Other Tax Credits

Besides the ERC credit, there are many other tax incentives available for businesses such as:

1. Work Opportunity Tax Credit: The WOTC found under Section 51 of the Internal Revenue Code provides federal employment tax relief to encourage employers to hire Americans in certain targeted groups who have consistently faced barriers to employment.
2. R&D Tax Credit: The Research and Development Tax Credit can be found under Section 41 of the IRC. This tax refund is available to any organization that engages in certain activities to develop new or improved products, processes, software, techniques, formulas, or inventions.
3. Energy Efficiency Tax Credit: Also known as a Section 179D deduction, this tax benefit is available to commercial building owners and contractors that reduce energy and power costs in government-owned buildings.

FAQ

Below you’ll find answers to our frequently asked questions that most employers ask about Employee Retention Tax Credit refunds, including what an eligible employer and qualifying wages are.