Are you a business owner who’s been impacted by the pandemic? If so, you may be eligible for the Employee Retention Credit (ERC). The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020 to offer financial relief to businesses whose operations were affected by the pandemic. Since then, it has changed and been expanded several times, allowing more businesses to take advantage of the ERC Fund.
However, many small businesses have not applied because they are unaware of their eligibility for the ERC program or find it challenging to complete the lengthy application process. Therefore, there are millions of dollars in unclaimed funds available.
Eligible employers can claim the ERC retroactively for tax years 2020 and 2021 and receive up to $26,000 tax refund per employee. There’s still time to claim these refunds, so don’t miss out on this opportunity to receive financial relief for your business. Act now before these funds are no longer available.
What is the ERC?
The ERC is a government program that was created to help employers keep their employees on payroll during the COVID-19 pandemic. It provides a fully refundable tax credit that is equal to a percentage of the qualified wages you paid your employees during the pandemic. The credit is applied against your federal payroll tax liability, and any excess credit amount is refundable. Once your claim is processed, the credit amount is paid to you by the IRS.
Given the potential benefits of the ERC, it’s definitely worth checking to see if your business qualifies for the program. The credit can provide much-needed cash relief during these challenging times. By taking the time to understand the program’s requirements and determining your eligibility, you can ensure that your business is taking advantage of all available relief options.
Keep reading to find out if you’re eligible and how the credit works, so you can gather all the information you need to apply. Trust us, it’s worth your time!
Who qualifies for the ERC?
The ERC is available to employers across various industries, both private businesses and tax-exempt organizations, provided that they meet one of the following criteria:
- Governmental Order Suspended Business Operations: Business operations were fully or partially shut down by government order. If an employer’s business operations continued but were subject to modification as a result of governmental order, the modification can be considered a partial suspension of business operations when it had more than a nominal effect on the business operations.
- Gross Revenue Declines: Businesses that don’t meet the first requirement but have a significant decline in quarterly gross revenue are still eligible for the ERTC fund program.
- Recovery Startup Businesses: Businesses that started operations after February 15, 2020, and have less than annual gross receipts of a million are also eligible.
Full or Partial Suspension
As noted above, one of the criteria that an employer must meet to qualify for the ERC is that the employer’s operations must have been fully or partially suspended due to a government order related to COVID-19. To meet these criteria, the employer must be subject to a relevant governmental order, proclamation, or decree from a federal, state, or local government that limits commerce, travel, or group meetings due to COVID-19.
For an employer to qualify for the ERC, the issuing state or local government must have jurisdiction over the employer’s operations. Examples of acceptable governmental orders include:
- A state governor mandating that all nonessential businesses must close until further notice.
- A city mayor requiring all businesses to limit occupancy to 50% of legal capacity.
- A local health department ordering all establishments to close early to clean and disinfect the premises to mitigate the spread of COVID-19.
In each instance the compliance is mandatory; conversely, government action that does not qualify would include:
- A government official merely encouraging diligence in maintaining social distancing or avoiding unnecessary travel.
- Guidance issued by the Centers for Disease Control and Prevention (CDC), as compliance is voluntary.
Business owners must retain copies of any governmental orders that have affected their operations in order to ensure their eligibility for the ERC program. This includes identifying the effective dates of the orders and the specific language that applies to the business. Furthermore, a clear and detailed explanation of how these orders have affected operations should be provided. This documentation is required in order to determine eligibility for the ERC program.
Partial Suspension of Operations
Determining if your business has suffered a partial suspension of operations from a government order requires an evaluation of whether more than a nominal portion of operations were suspended. To qualify for the ERC under the partial suspension criteria, the employer must pass two tests:
Test 1: Governmental Order. The employer must be subject to a relevant mandatory governmental order related to COVID-19 that limits commerce, travel, or group meetings, issued by a federal, state, or local government that has jurisdiction over the employer’s operations.
Test 2: Nominal Impact. The employer must demonstrate that the government order had a nominal impact on its business operations. The IRS provides two safe harbors for determining this:
- Gross receipts from the suspended portion of the business should not be less than 10% of the total gross receipts for the same calendar quarter in 2019.
- Hours of service performed by employees in the suspended portion of the business should not be less than 10% of the total hours of service performed by all employees in the employer’s business for the same calendar quarter in 2019.
Modification of Business Operations
If your business operations were modified but not suspended, and it had more than a nominal effect, it will be considered a partial suspension, and you may still be eligible for the ERC. A modification will have more than a nominal effect if it results in a 10% or more reduction in an employer’s ability to provide goods or services in its normal course of business. Examples of ordered modifications that may result in a more-than-nominal effect include:
- Reducing the capacity of the business, such as limiting the number of customers or clients allowed in the store, office or establishment at one time.
- Changing the hours of operation, such as closing earlier or opening later than normal.
- Limiting the services offered, such as closing a certain department, or discontinuing a product line or service
- Restricting the use of certain equipment or facilities, such as closing a gym, pool or a specific area of the establishment
- Implementing health and safety protocols, such as increasing cleaning and sanitation efforts, implementing social distancing, or requiring temperature checks for employees and customers.
- Restricting operations to only online, phone or delivery orders.
- Closing down certain locations or reducing the number of locations open.
Significant Decline in Gross Receipts
When a business cannot qualify under the criteria of full or partial suspension due to a government order related to COVID-19, it can then see if it qualifies under the second criterion of the significant decline in gross receipts. Gross receipts refer to the total amount of income that a business receives from its customers before any deductions for expenses, taxes, or other costs.
2020 ERC criteria:
- An employer is considered to have experienced a significant decline in gross receipts if its gross receipts for a calendar quarter in 2020 are less than 50% of its gross receipts for the same calendar quarter in 2019.
2021 ERC criteria:
- An employer is considered to have experienced a significant decline in gross receipts if its gross receipts for a calendar quarter in 2021 are less than 80% of its gross receipts for the same calendar quarter in 2019 or 2020.
Recovery Startup Businesses
Another way for businesses to qualify for the ERC is by being a recovery startup business (RSB). A business is considered as RSB if it started carrying out a trade or business after February 15, 2020 and have an average annual gross receipts for the three-tax-year period ending with the tax year that precedes the calendar quarter for which the ERC is determined not exceeding $1,000,000.
For eligible employers that are recovery startup businesses (RSBs), the amount of credit allowed for any calendar quarter shall not exceed $50,000. The credit for RSBs may be claimed for wages paid after June 30, 2021 and before January 1, 2022. This is a great opportunity for small businesses that started operating during the pandemic to take advantage of the ERC program and receive financial relief.
How are ERC credits calculated?
The credit is calculated based on the qualified wages paid to employees during the specified period. The calculation of the ERC for 2020 and 2021 is different.
2020 ERC criteria:
- For the 2020 tax year, the ERC was limited to 50% of the first $10,000 of qualified wages paid to the employee from March 13, 2020, to December 31, 2020. This means that the maximum amount that could be credited back to the employer was $5,000 per employee.
2021 ERC criteria:
- For the 2021 tax year, the ERC is equal to 70% of up to $10,000 in qualified wages paid to an employee per quarter from January 1, 2021, to September 30, 2021. The maximum credit that can be claimed for each employee per quarter is $7,000. An employer could receive up to $21,000 credit for each employee in 2021.
What are qualified wages?
When it comes to calculating the ERC tax credit, it’s important to understand what qualifies as “qualified wages.” This refers to the compensation and healthcare costs paid to employees that can be taken into account when determining the credit.
Small employers are eligible for ERC on wages paid to employees regardless of whether they worked or not. Large employers, on the other hand, are limited to including only wages paid to employees for not providing services.
The criteria for determining if a business is considered a small or large employer for ERC purposes is based on the number of full-time equivalent employees (FTEs) during the tax year 2019. A full-time employee is an employee who worked an average of at least 30 hours per week or 130 hours or hours per month.
2020 ERC criteria:
- Small employers: Employers with 100 or fewer full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees during relevant quarters, whether they were providing services or not.
- Large employers: Employers with more than 100 full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees who were not working during relevant quarters.
2021 ERC criteria:
- Small employers: Employers with 500 or fewer full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees during relevant quarters, whether they were providing services or not.
- Large employers: Employers with more than 500 full-time equivalent employees during 2019 can apply ERC to all qualified wages paid to employees who were not working during relevant quarters.
As stated in the IRS’s Notice 2021-49, in most cases, wages paid to majority owners and their related individuals do not qualify for the ERC. This means that if an individual owns more than 50% of the business, their wages and those of their relatives would not be considered qualified wages for the purpose of the ERC.
Another important aspect to consider when determining qualified wages for the ERC is how it interacts with other relief programs, such as the Paycheck Protection Program (PPP). Businesses cannot double dip and claim the same wages for both programs. Wages used to calculate forgiveness of a PPP loan cannot be considered qualified wages for the ERC.
Preparing for ERC Filing
The first step in applying for the ERC is to gather all the necessary documentation. The IRS is primarily focused on determining eligibility, including whether taxpayers and applicants correctly calculated the amount of paid tax, eligible employees, and the impact of the pandemic on their business.
When creating a file with all the support documentation, it’s crucial to confirm and document all the specifics of the ERC claims. This includes gross receipts, payroll logs, lists of employees and owners, any related parties with interest in the business, previously filed tax forms, and notices of suspension of operations during the eligibility period. Additionally, if you received a Paycheck Protection Program loan, you should also include documentation related to your application and loan forgiveness. Keep in mind that clients must retain all of this documentation for at least four years after the date the tax is due or paid (See Notice 2021-20).
It’s essential to work closely with a tax professional to ensure that all the required documentation is in order and that the application is completed correctly to avoid any delays or issues. With the right preparation and guidance, businesses can take advantage of this valuable tax credit and receive much-needed financial relief.
Apply for ERC
Don’t miss out on the valuable opportunity to receive financial relief for your business through the ERC program. The ERC can increase a business’s cash flow as it is a fully refundable payroll tax credit, potentially giving back more in refunds than was paid in payroll taxes. Eligible employers can claim the ERC retroactively for tax years 2020 and 2021 to claim a significant credit of up to $26,000 per employee. Take the time to understand your eligibility and apply as soon as possible. There are several reasons why you should consider applying for the Employee Retention Tax Credit (ERC) now:
- Limited time to apply: The ERC is only available for a limited time, and it’s important to act quickly to ensure your business can take advantage of this opportunity.
- Most businesses impacted by the pandemic qualify: The ERC is available to a wide range of businesses that have been impacted by the pandemic, including those that have experienced a significant decline in gross receipts or have been forced to close due to government-mandated shutdowns.
- Provides cash flow: The ERC can provide your businesses with much-needed cash flow, which can be used to cover expenses such as wages and salaries, rent, and other operational costs.
- Funding flexibility: The funds received from the ERC can be used for any business purpose, giving you the flexibility to use them in the way that is most beneficial for your operations.
- No repayment required: Unlike a loan, the ERC does not have to be repaid, making it an attractive option for businesses looking for financial assistance.
Why Choose Eco-Tax for Your ERC Process
At Eco-Tax, our team of experts have extensive knowledge of the Employee Retention Tax Credit (ERC) and have been helping small businesses navigate the process of applying and securing the credit. We understand the process can be challenging and working with a professional can help ensure your business qualifies and gets the most out of the credit. As ERC specialists, we possess a deep understanding of the criteria and regulations that businesses must meet to qualify for the credit, and are well-versed in identifying and calculating qualified wages, preparing necessary documentation, and filing amended tax returns. We can also ensure compliance with all ERC regulations to help your business avoid any issues with the IRS. Additionally, we have been helping small businesses with their ERC application since the the start of the pandemic and have a great understanding of the nuances and challenges that small businesses face when applying for the credit. Trust our team of experts to help you claim and maximize your ERC refund, ensure compliance with the most recent IRS ERC rules and regulations, and save thousands of dollars by choosing us over other ERC providers. Contact our ERC team today.