The pandemic prompted the creation of various programs to support small businesses. While most COVID-19 aid has ended, the Employee Retention Credit (ERC) is still active and available for business owners.
In this article, we will outline answers to frequently asked questions about the Employee Retention Credit, debunk ERC myths, and show how you can claim ERC for your business.
What is the Employee Retention Credit?
The Employee Retention Credit, or ERC, is a refundable payroll tax credit that was created as part of the CARES Act. ERC allows qualifying businesses to claim payroll tax credits on qualified wages – including some health insurance costs – that were paid to employees during the COVID-19 pandemic. ERC is not a loan or grant program. ERC funds can be spent by business owners when and how they choose.
What is a Tax Credit?
A tax credit issued through the Employee Retention Credit program allows employers to receive cash back from the IRS. Business owners who do not owe back taxes and qualify for ERC can expect to receive a check from the IRS.
What Does “Retaining Employees” Mean?
If your business was started before February 15th, 2020, a retained employee is noted as:
Please note: if your business was started after February 15th, 2020, you may still qualify, please skip to the “Recovery Startup Business ERC Eligibility” section.
Eligibility Changes and Constants
ERC eligibility has changed since its initial appearance in the CARES Act. Today, businesses that received one or two PPP loans qualify for ERC along with hospitals, colleges, universities, and 501(c) organizations.
Earlier versions of ERC limited businesses with a PPP loan(s) from applying. Today, businesses who received a PPP loan(s) can still claim ERC. Scroll to the “ERC and PPP” section to see more.
ERC qualification is still determined by quarters each year, as outlined below. Businesses that meet the retained employee status can claim ERC for 2020, 2021, or both.
2020 ERC Eligibility
Beyond meeting the retained employee status, to qualify for the 2020 ERC, you must meet at least one of the following requirements:
Please note: This means that a business who retained employees and saw an increase in gross revenue still qualifies as long as the business was impacted by lockdowns and/or other governmental restrictions.
2021 ERC Eligibility
Beyond meeting the retained employee status, to qualify for the 2021 ERC, you must meet at least one of the following requirements:
ERC Eligibility Notes
Due to the variety of legislative changes on ERC eligibility, it can be difficult to understand if your business fits the requirements.
NEWITY can help determine whether you qualify for ERC and quantify your maximum ERC cash back for free. When you are ready, NEWITY can help you file for and obtain the credit. To learn more, please contact us here.
Recovery Startup Business ERC Eligibility
This option for ERC applies to a special group of businesses, deemed Recovery Startup Businesses, which can claim a higher ERC amount. To qualify as a Recovery Startup Business, you must:
Note: To learn more about who qualifies as a Recovery Startup Business, visit IRS notice 2021-49.
Recovery Startup Business ERC Notes
Recovery startup businesses can qualify for up to $7,000 per employee for Q3 and Q4 2021, with a total credit cap of $50,000 per quarter, totaling a maximum tax-credit of $100,000.
Since ERC is filed based upon the year of eligibility, each year has a maximum credit. The total maximum credit per employee is $26,000, comprised of $5,000 per employee in 2020 and $21,000 per employee in 2021.
2020 ERC Maximums
For 2020, ERC can be claimed as a refundable tax credit on wages that were paid between March 13, 2020, and December 31, 2020.
ERC for 2020 is 50% of total wages paid, up to $10,000 per employee, resulting in a $5,000 maximum tax credit per employee.
2021 ERC Maximums
For 2021, the maximum ERC amount was increased to $7,000 per employee per quarter from Q1 through Q3 2021. Thus, the maximum credit for the full year is $21,000 per employee.
Recovery startup businesses can extend the $7,000 per employee amount through Q4 2021, which brings recovery startups’ maximum credit for the full year to $28,000 per employee.
ERC and PPP
As mentioned in the “Eligibility Changes and Constants” section, businesses with a PPP loan(s) can claim ERC with recent eligibility changes.
The inclusion of borrowers with PPP loans is particularly helpful for businesses with payroll costs in excess of your PPP loan amount. It is important to note that you cannot double count payroll - i.e., you may not use the same wages to count toward the ERC and PPP.
How can I claim the ERC for my small business?
If you think that your business is eligible for ERC in 2020 and/or 2021 and you haven’t claimed the credit yet, it’s not too late.
NEWITY can help determine your eligibility and calculate your maximum refund right from their Employee Retention Credit page or in the NEWITY Portal.
After submitting NEWITY’s two-minute form, you will see your maximum refund available. Then the NEWITY team will follow up to collect necessary supporting documents to prepare your detailed calculation and tax form to claim the credit, known as a Form 941-X. Beyond gathering the correct forms, NEWITY will do the work for you. We will perform the calculation, create and send you your tax form to collect your signature and submit the form to the IRS on your behalf.