The Employee Retention Credit (ERC) is a refundable federal tax credit introduced during the COVID-19 pandemic to incentivize employers to retain employees on payroll. It is not a loan and does not require repayment. The credit is available for tax years 2020 and 2021, with different percentages and limits based on the timeframe. In 2020, the credit was 50% of up to $10,000 in wages per employee, totaling up to $5,000 per employee. 

In 2021, the credit increased to 70% of up to $10,000 in wages per quarter, resulting in a potential credit range of $21,000 to $28,000 per employee for the year. However, for the 4th quarter of 2021, only businesses opened after February 16, 2020, with less than $1,000,000 in revenue, can file for the credit, known as Recovery Startup Business, potentially receiving up to $33,000 per employee.

The ERC program aims to assist businesses in recovering from the economic shutdown, compensating for lost revenue, and maintaining operations while retaining employees. Although the program officially ended in 2021, businesses can still file to receive funds. Many businesses qualify for ERC but are often unaware of their eligibility.

How to Qualify for ERC

Businesses must have experienced a significant decline in gross receipts during 2020 or a general decline in gross receipts during 2021 compared to corresponding quarters in 2019. The business should also operate within the US, regardless of size, and have faced a full or partial suspension of operations due to government orders or experienced a more than nominal impact on operations. Additionally, businesses that meet the criteria as a Recovery Startup Business in the third or fourth quarter of 2021 may qualify.

ERC requires considering qualifying wages, which include cash payments and a portion of employer-provided health care costs. Businesses that received Paycheck Protection Program (PPP) loans may still be eligible for ERC. The credit amount depends on the average full-time employees in 2019, with different calculations for businesses above or below certain thresholds.

Claiming ERC typically involves amending tax filings, and it may take 4-10 months for the IRS to process claims and issue checks. To navigate the complexities of ERC, businesses can seek assistance from qualified experts like Credit League. They provide consultations, help with documentation, and maximize the credit return. Credit League’s team of attorneys and CPAs can guide businesses through the qualification process, prepare necessary paperwork, and maintain contact with the IRS throughout the filing process.

In Summary

ERC is a valuable tax credit aimed at supporting businesses during the COVID-19 pandemic. By understanding the eligibility criteria, businesses can potentially save up to $26,000 per employee, and seeking professional assistance can help streamline the filing process and maximize the credit.