The coronavirus pandemic took the world by surprise in early 2020, and the impact on businesses is still being felt today. Throughout the nation, many businesses were forced to close their doors temporarily as health authorities tried to get the rapidly spreading virus under control.
Although some were able to carry on operations remotely, customer-facing businesses such as those in the food service, retail and hospitality sectors experienced significant hardship that left them unable to stay afloat.
The U.S. government created the Employee Retention Credit program, or ERC, as a response to the economic shutdown spurred by the COVID-19 pandemic. This program incentivizes small businesses through a refundable tax credit that is awarded to those who maintained their payroll in 2020 and 2021. Here is a closer look at what is involved in this credit and which businesses qualify for it.
The Employee Retention Credit was introduced as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in March 2020 to help employers keep their workers on their payroll during the challenging times experienced during the height of the pandemic.
The tax credit was worth 50% of the wages of employees who qualified when it was originally introduced, although this was limited to $10,000 for any single employee. However, the credit was updated to increase the percentage of qualified wages from 50% to 70% for 2021, while the wage limit per employee climbed from $10,000 per year to $10,000 per quarter.
Eligible businesses of all sizes, that paid qualified wages to employees, can receive credit but there are rules that apply to certain employers according to their head count.
For example, employers who have 100 or fewer full-time employees will see all of their employee wages qualifying for the credit, regardless of whether they were open for business or the subject of a shutdown order. However, for employers that have more than 100 full-time employees, qualified wages are only those paid to employees when not providing services as a result of COVID-related circumstances.
Employee Retention Credit Eligibility
Any tax-exempt organization or private sector employer who continued to operate during the calendar year 2020 is eligible for the credit if one of the following requirements is met:
- It experienced a major decline in gross receipts during a calendar quarter, defined as below 50% of the gross receipts for that same calendar quarter in 2019.
- It suspended its operations during a calendar quarter, either partially or fully, in response to orders from government authorities limiting group meetings, travel or commerce.
While self-employed individuals were not eligible for the 2020 ERC on their own wages, they may have qualified on the wages they paid to other people they employed. State and government entities were not eligible for the ERC in 2020.
The credit for 2020 was $10,000 per employee for the year.
For 2021, the eligibility rules were changed. For the period from January 1st to September 30th, businesses that were fully or partially suspended due to COVID-related orders from government authorities and those who experienced significant declines in gross receipts related to COVID-19, which was defined as less than 80% of their gross receipts for that same calendar quarter in 2019, were eligible.
In order for a business to qualify as being partially suspended during the period, their business operations must have been limited as a result of a decree, proclamation or local order that impacted their operations. For example, if a restaurant was forced to close its dining room but was allowed to offer deliveries, that would fall under the category of partially suspended operations.
Partially suspended business may have also occurred due to a limitation on opening hours, such as bars being required to close at 10:00 PM rather than 2:00 AM. It also applies to those whose business premises were forced to close and their work could not be performed on a remote basis.
Tax-exempt public colleges, hospitals and universities were eligible for the 2021 ERC, but state and government entities were not. As in 2020, self-employed individuals were not eligible for the credit for their own wages but could qualify for the wages paid to any employees they had during the period.
The credit during this period was equal to 70% of qualified wages, with the maximum qualified wages per employee in each quarter limited to $10,000. This resulted in a maximum credit for any employee of $7,000 per quarter or $28,000 for the year.
Is It Too Late to File for ERC?
The credit was discontinued at the close of 2021, but employers may still file for the credit retroactively via amended payroll tax returns as long as they do so within three years of the date of filing.
Employers who did not claim the Employee Retention Credit on their quarterly payroll tax returns in 2020 or 2021 can file amended returns for each quarter during which the credit can be claimed.
Employers who filed annual payroll tax returns may file an amended return with one of two forms. Form 944-X is the Adjusted Employer’s Annual Federal Tax Return or Claim for Refund, while form 943-X is the Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund.
What About Companies That Received Loans From The Paycheck Protection Program?
According to the CARES Act, any employer who received a loan from the Paycheck Protection Program, or PPP, was not eligible for an employee retention credit unless they repaid their PPP loan by May 18, 2020.
However, this provision was later repealed by the Taxpayer Certainty and Disaster Tax Relief Act of 2020. This allowed PPP loan recipients to become eligible for the ERC. It is important to note that wages that were paid using a PPP loan that was forgiven will not be considered qualifying wages for the tax credit.
Contact the Business Consultants at Business Benefits Group (BBG)
The tax regulations surrounding the Employee Retention Credit and other types of assistance are complicated. Ensure that your business is receiving the credit it is entitled to by consulting with the experienced advisors at Business Benefits Group (BBG).