To be considered an eligible employer who can qualify for this refundable tax credit, you’ll need to know the ERC rules and requirements. First off, your refund amount will be determined by employment tax deposits and qualified wages paid to W2 employees in 2020 and 2021.
When claiming the Employee Retention Credit (ERC), eligible employers are defined as those who carried on a trade or business during the calendar year of 2020 or 2021; and can also meet one of these two qualification requirements.
- Employer experienced a significant decline in gross receipts of 50% in 2020, or 20% in 2021 compared to the same quarter in 2019
- Employer received government orders to shut down during the covid-19 pandemic which directly impacted their ability to performnormal business operations
Since the Taxpayer Certainty and Disaster Tax Relief Act of 2020, businesses that received a Paycheck Protection Program (PPP) loan can also now qualify for the credit by managing ERC and PPP interaction. Most businesses that only began operations after February 15th, 2020, and cannot otherwise qualify for the ERC, can also claim the employee retention tax credit as a recovery startup business.
Owning a business that was deemed essential during the global pandemic is not enough to disqualify you from claiming the ER. When debunking ERC myths, you’ll find even when a business was deemed essential, the IRS will encourage employers to still apply for a payroll tax credit refund.
The main ERC qualifying factor for an essential business is being able to prove disruptions to normal operations had a nominal effect on expected versus actual revenues. Many essential grocery stores, gas stations, manufacturing plants, health care centers, retirement homes, and even some tax-exempt organizations were able to claim a refund of qualified wages paid to employees based on employee or supply chain disruptions alone.
Along with the many businesses that were deemed essential, many employers who profited during coronavirus shutdowns also received large ERTC refund checks. While a significant decline in average annual gross receipts is one of two eligibility requirements, fully or partially suspended businesses and those whose operations were disrupted can qualify in many different ways.
Project cancellations due to governmental directives or orders are one possible way to qualify, as our specific disruptions to your workforce, sales force, or supply chain. Production losses due to worker safety, sanitization, shift changes, etc. are also valid reasons that will help most employers qualify for the employee retention credit.
According to the Bureau of Labor Statistics, roughly 31.5% of employers in the United States received a governmental order enforcing a full or partial shutdown due to being classified as a nonessential business. They were also usually the first ones ordered to close, and the last allowed to reopen.
The financial hardship that many non-essential employers experienced during the covid-19 pandemic could already ensure they are ERTC qualified. Those that fail the gross receipts test, could still pass the employee retention credit eligibility rules based on shutdown orders alone.
Some of the hardest non-essential businesses hit were retail stores and shopping malls, beauty salons and spas, gyms, sporting, and concert venues. Many restaurants and bars had to shut their doors too, but even those allowed to stay open with limited capacity or take-out-only services could still easily qualify for this refundable payroll tax credit.
Since the American Rescue Plan Act of 2021 was enacted, employers who began operations during the coronavirus pandemic can claim the employee retention tax credit as a Recovery Startup Business.
- Began carrying on trade or business after February 15, 2020
- Not otherwise considered to be an ERC-eligible employer
- Paid qualified employee wages to W-2 workers in 3rd or 4th quarter of 2021
- Did not have annual gross receipts that exceed $1 million in last 3 years
Recovery startup businesses that were able to pay qualified wages to W2 employees during the third and fourth quarters f 2021 only, can claim a maximum credit of $100,000, with a $50,000 maximum per quarter.
Supply Chain Disruption
One of the most common ways for profitable or essential businesses to claim the ERC is to prove the effect of supply chain disruptions on normal business operations.
In Notice 2021-20, the IRS added two supply chain provisions concerning the employee retention tax credit that have a ten percent rule. To pass either nominal effect test, an ERTC claimant must prove a quantifiable loss in expected versus actual performance that can be attributed to a governmental order or directive.
- 10% loss of total company revenue
- 10% loss of total company labor hours
If your business received a full or partial suspension order, then you can stake an ERTC claim based on lost company revenues in one particular area of your business, such as indoor dining.
To pass the nominal portion test, gross receipts from the claimed portion of business operations must be at least 10% of the employer’s total gross receipts. This nominal percentage to determine eligibility is calculated by evaluating expected revenues for the same calendar quarter in 2019.
If your business operations were subject to government-ordered modification rather than suspension, then the IRS offers a second way to qualify for the ERTC. To pass the nominal modification test, the total number of employee hours must have been reduced by 10% compared to the same quarter in 2019.