The Employee Retention Credit is available to companies that had employees on their payroll throughout the coronavirus crisis. In this guide, you’ll learn more about the ERTC, how it works and what businesses are eligible to claim it. You’ll also discover how to calculate the amount of the ERC you’re eligible to take, what’s needed to apply and more.
What is the Employee Retention Credit?
Here’s how it’s defined by the Internal Revenue Service (IRS):
“The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021.”
How Does the Employee Retention Credit Work?
The Employee Retention Credit was rolled out under the CARES Act as a form of pandemic relief for small businesses. Qualifying employers get a tax credit of up to $26,000 for each W2 employee listed on their payroll.
It can be claimed on an original or adjusted employment tax return from a period that falls in this timeframe, per IRS.gov. More on this shortly.
Like other tax credits, the Employee Retention Credit is refundable. This means you aren’t required to repay it to the IRS.
Who Is Eligible for Employee Retention Credit?
The IRS states following entities are eligible for the Employee Retention Credit:
- Employers who sustained a partial or full halt in operations due to COVID-19 orders from a governmental authority. Qualifying operations include commerce, group meeting or travel-related affairs.
- Employers who witness a steep decline in gross receipts sometime in 2020 or the first three quarters of 2021
- Employers classified as recovery startup entities in the third or fourth quarter of 2021
What Wages Qualify and How Do You Calculate Employee Retention Credit?
Here’s a breakdown of the Employee Retention Credit:
- Tax year 2020: The maximum allowable refund per employee is $5,000. This figure represents 50 percent of the first $10,000 in wages earned by the employee in 2020.
- Tax year 2021: The maximum allowable refund per employee is $21,000 for quarters 1, 2 and 3. This figure represents 70 percent of the first $10,000 in wages earned by the employee in the first three quarters of 2021.
Can a Business Claim Employee Retention Credit Retroactively?
If you haven’t yet applied for the Employee Retention Credit, but your company is eligible, you are allowed to claim it retroactively.
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What Are the Qualifications for Employee Retention Credit?
The Employee Retention Credit comes with guidelines related to the number of W2 employees and the financial impact resulting from COVID-19. In addition, you must meet the following criteria to be eligible for the Employee Retention Credit:
- In tax year 2020, you could have up to 100 full-time W-2 employees. Regarding the financial impact of the coronavirus pandemic, it must have resulted in a drop of no more than 49 percent of your company’s gross revenue compared to 2019 receipts. Furthermore, the negative financial impact must be related to the mandatory closures enacted by the governmental authorities.
- In tax year 2021, your company’s roster of full-time W-2 employees was less than 500. The drop or gross revenue was also limited to 79 percent of 2019 receipts. Like the rules for tax year 2020, the drop in revenue must be a direct result of coronavirus-related closures mandated by government entities.
Recovery startup businesses are also eligible if:
- Operations commenced after February 15, 2020
- At least one W2 employee was on the payroll
- Gross annual revenue was less than $1 million
Below are two charts that illustrate the qualifications for the Employee Retention Credit in a condensed format:
|Tax Year||Number of Full-Time W2 Employees||COVID-19 Financial Impact|
|2020||No more than 100||Gross revenue reduction of no more than 49 percent from government-mandated closures (based on 2019 receipts)|
|2021||Less than 500||Gross revenue reduction of no more than 79 percent from government-mandated closures (based on 2019 receipts)|
|Opening Date of Recovery Startup Business||Number of Full-Time W2 Employees||Annual Gross Receipts|
|After February 15, 2020||At least one||Less than $1 milion|
*For the purpose of this illustration, a full-time employee is an employee whose work hours average over 30 weekly. If your employees received cash tips exceeding $20 monthly, these amounts are also admissible as qualified wages for the Employee Retention Credit.
What Else Do You Need to Apply?
Below is a list of what you’ll need to apply for the Employee Retention Credit:
- Name, location and description of your company
- Form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund)
- Payroll reports that include each employee’s name, the amount of gross wages and payment dates
- Data submitted to request a PPP loan and forgiveness
How to File and Apply for Employee Retention Credit
Consult with a reputable tax professional or accountant to start the process of filing and applying for the Employee Retention Credit. They will help you prepare the necessary documents required to claim the credit.
The cutoff for amendments to your 2020 and 2021 tax filings is April 2024 and April 2025, respectively.
If you work with a specialist to apply for the Employee Retention Credit, here’s a breakdown of how the process could work:
- Step 1: Pre-qualify with the specialist. Many have online tools you can use to input a few figures and determine if your company potentially qualifies for the Employee Retention Credit in minutes.
- Step 2: Apply to work with the specialist. Once you’ve gauged your eligibility for the Employee Retention Credit, the next step is to formally apply with the specialist, so they’ll know you need their assistance. During this step, prepare to provide any payroll-related documentation and figures needed to submit your application to the IRS.
- Step 3: Consult with the specialist. They will communicate how the process works and address any questions or concerns you may have. Step 4:
- Step 4: Await the results. During this step, the specialist will work directly with the tax experts on their team to calculate the Employee Retention Credit amount you’re eligible for based on the data and documentation you submit.
Once the specialist submits your company’s application for the Employee Retention Credit to the IRS, you can await the arrival of the funds owed to you. Upon approval, you’ll receive the money for the credit in your bank account.
Note: The processing time for Employee Retention Credit applications is currently between two and eight months. So, it’s vital to be patient while you await a response and funding from the IRS.
Frequently Asked Questions (FAQs)
Below are some frequently asked questions regarding Employee Retention Credit:
Companies must meet certain criteria to qualify for the Employee Retention Credit. For example, if your operations were partially or completely stopped due to government orders resulting from the coronavirus, you could be eligible for the Employee Retention Credit. A drop in gross revenue in 2020 or in the first three quarters of 2021 is also required. Or you could be eligible if you started a recovery startup business during the third or fourth quarter of 2021.
No, freelancers, whether working as sole proprietors or owners of an LLC, are not eligible for the Employee Retention Credit. However, if your company is registered as a C-Corp or S-Corp and you receive compensation via payroll as a full-time employee, the entity may be able to claim the Employee Retention Credit assuming all the other guidelines are met.
If your company received PPP loan forgiveness, you could still be eligible for the Employee Retention Credit. However, only wages that weren’t included in the amount forgiven are eligible for inclusion in the calculation used to determine how big of a credit your company is eligible for.
The Employee Retention Credit is not a loan. So, there’s no need to repay the funds after receiving them from the IRS.
When you submit a claim for the ERC credit, the IRS processes your application. If approved, you’ll generally receive the credits in two to eight months.
It’s a personal decision. However, it could be in your best interest to hire help unless you have an in-house tax specialist or accounting team to assist with the application. You could also reach out to your Certified Public Accountant for assistance, recommendations or guidance on how to move forward.