Is it legit? $26,000 per employee? How does the ERC work? All great questions, and this is your ultimate guide to the employee retention tax credit, aka ERC or ERTC. Here you will find answers to some common questions that small businesses have regarding ERC. We will also discuss how the Employee tax credit works.
Summary of how ERC has evolved
In 2020, the credit could be taken for Q2, Q3 & Q4 for up to 50% of the wages you paid your employee, up to $10,000 in wages. That means that in 2020 you can get a credit of up to $5,000 per employee. But in 2021, the credit was greatly increased. The credit percentage was raised from 50% to 70% of the wages you paid the employee. This is with the yearly limit of wages of $10,000 being changed to a quarterly limit of $10,000.
That means that in 2020 the max credit was 5,000 per employee. But in 2021, it was 7,000 per quarter for a total of $21,000 or less, depending on your business. This is why you will see companies saying they qualify for 26,000 per employee through the ERC ($5,000 for 2020 and $21,000 for 2021). In 2021 the credit can be taken in Q1, Q2, Q3, and Q4. But the 4th quarter can only be taken for those businesses that are considered Recovery startup businesses.
Are ERC and ERTC the same thing?
Yes, they are the same thing. There’s the short version “ERC” Employee Retention Credit or the longer version ERTC or Employee Retention Tax Credit, but they refer to the same tax credit.
Who qualifies for the employee retention credit?
All types of businesses and non-profits as long as they paid some workers as w-2 employees during that time. The rules are different for large and small businesses. Small businesses were defined in 2020 as those with 100 full-time employees or less. In 2021, 500 full-time employees or less. For small businesses, the credit is far easier to qualify for. This is because the wages you paid your w-2 workers qualify for the calculation.
The first part of qualifying for the credit.
- Did you pay employees (w-2)
- Are you large or small? If small, all wages qualify.
If you’re a large business with over 100 employees in 2020 or over 500 in 2021, then only the wages you paid your employees while they were NOT working qualify.
The second part of qualifying for the credit.
- Was your business fully or partially shut down due to a government order?
- Did gross sales decrease by more than 50% or more in (2020) or (20% in 2021)? When compared to the same quarter in 2019 or the immediately preceding quarter?
What if you started your business during covid, is a new business eligible?
Yes, new businesses can qualify, but they have different rules. A recovery startup business is an employer that began carrying on a trade or business on or after February 16, 2020. Therefore, the determination of when an employer “began carrying on a trade or business” is made in the same manner as found in the purposes of section 162. In general, for purposes of section 162, a taxpayer has not begun carrying on a trade or business. This is “until such time as the business has begun to function as a going concern and performed those activities for which it was organized.” To qualify as a recovery startup business, your business has to have started after February 16, 2020.
Can I still claim the credit in 2022,2023, 2024?
There’s no application for credit. It’s filed on your payroll tax form 941, and the credit is only applicable for 2020: Q2, Q3, & Q4 and for 2021 Q1, Q2, Q3 Q&4, with Q4 only being for the RSV. However, if you just realized that you qualify, you can amend the quarter you qualify for. You have three years from the date you filed your payroll tax form or the date you should have filed your payroll tax form. For the 2020 payroll, Q2 was April, May, and June. It was due by the end of the following month, July 31, 2020. You have until July 31, 2023, to file an amended return for that quarter. Remember that payroll quarters are standard, unlike quarterly estimated taxes, so distinguish that. So for the following periods, you can see when they are due here: list it out.
- 2020 Quarter 2 – July 31, 2023
- 2020 Quarter 3 – October 31, 2023
- 2020 Quarter 4 – January 31, 2024
- 2021 Quarter 1 – April 30, 2024
- 2021 Quarter 2 – July 31, 2024
- 2021 Quarter 3 – October 31, 2024
- 2021 Quarter 4 -January 31, 2025
There is still time to qualify for the credit. As you can see above, Q4 of 2021 is due on January 31, 2025. However, you want to do this as soon as possible and certainly before July 2023 if you qualify for Quarter 2 of 2020.
Who can claim the ERC credit?
All types of businesses can claim the credit, including sole prop, LLCs, corps partnerships, and non-profits. Now if you control, meaning you own multiple businesses, then you may need to treat those businesses as one business.
What are the IRS aggregation rules for ERTC?
If you control, “meaning you own multiple businesses,” then you may need to treat those businesses as one for the credit.
- If You Own 50% or more of multiple businesses or
- If you and four others or fewer, five people total or less, own 80% or more of multiple businesses, then that means you have a subsidiary, and that means that the aggregate rules apply, and you must treat that as one business for calculating the credit.
This affects counting the total number of employees but also involves calculating a decrease in gross receipts—50% in 2020 or 20% in 2021. What happens is one of your businesses might not have qualified while others did qualify, but because you group them, overall, you might qualify for all employees, even for the business that wasn’t shut down during covid or didn’t have a decrease in gross receipts, but because you lumped them in with your other businesses you could qualify for everyone.
How do I count the number of full-time employees?
What is considered a full-time employee? Full-time employees worked 30 hours or more per week or 130 hours or more per month. You’ll add up the number you had each month and divide the total by 12, giving you your average full-time employees. For other tax rules, there is a concept called full-time employee equivalence, where you add up your part-time hours and your part-time employees to calculate the full-time employee equivalent number, but You do NOT need to do that for ERTC.
If you had 200 Part-time employees only that never met the threshold for any month, then you have 0 FT employees, and your employees qualify for the credit. Likely said before, this is a significant impact on determining if you are a large or small employer and being a small employer is going to be much more advantages for this credit because all wages you pay your employees to qualify for the credit vs. once you’re a large business only wages you paid to your employees while they weren’t working actually qualify.
Is the ERC a legitimate program, or is this a scam?
Yes, the ERC is real and legitimate. However, you do need to be on the lookout for ERC mills. The IRS calls these companies that set themselves up JUST to file the ERCs. The problem is that they are just looking to make a bunch of money, and some are even filing incorrect tax returns to get you the most money possible because they are charging a percentage fee of the money you get back.
The issue here is that you, as the tax, are responsible. So if the IRS audits you in a few years and finds out that some of the deductions you didn’t qualify for, you could end up having to pay interest and penalties since the time it took them to audit you. This is something to be aware of and avoid because they aren’t going to help you make sure that you’re taking the credit right.
Do you need five or more employees to qualify for the ERTC?
No, there’s no limit to employees. You are eligible as long as you had 1 FT W-2 employee. Again, you must be on the lookout for the ERC mills that say you must have 5 or 10 or more employees to qualify.
Can I apply for the ERC, or do I have to hire someone?
Yes, if you have been filing your Form 941s yourself, you can include the credit on these forms. If you use a payroll service for processing your 941s, you should first talk to them about doing the amendments for you. Several accountants and payroll companies have told people they don’t qualify. If you want to speak to an ERC Specialist to find out, this article will explain how to do that.
How long does it take to get the ERC refund?
It takes approximately nine months on average to process the amended payroll tax forms and send out checks.
Can the owner claim the ERC tax credit on their wages?
If you own an s corp or c corp and pay yourself as an employee w-2 wages, the short answer is NO. You yourself, as the owner, your wages, and the wages of your family members do not qualify.
How do you receive the Employee retention tax credit if you qualify for the ERC?
Filing the payroll tax forms: form 941, and you take a credit on the taxes you owe because you, as the employer, are going to pay 7.65% in ss and Medicare taxes on your 941 forms, and when you fill out this form, you’re going to get a credit against the taxes you paid which can be refundable, meaning you could have a far bigger tax credit for the ERC than what you owe on the wages you paid your employees.
Do you have to pay taxes on the ERC tax credit?
NO! The tax credit is not something that you get in 2023 that you have to report as an income tax return. It is not income. However, it has the net impact of increasing your income tax by the tax credit amount.
So how does the ERC affect income tax?
The credit will result in an increase to your income tax, and this is because you deduct your payroll costs on your business tax return, and you can’t deduct amounts that you receive back through ERC, so you’ll need to amend your business tax return to adjust your payroll costs to the amount you received back as the ERC credit. For Example: If you paid your employee $10,000 and you got ERC credit for $7,000, you would need to amend your business income tax return to change your payroll cost deduction from 10,000 to $3,000 because 7,000 of that is no longer a business expense, you got that money back.
What is included in ERC-qualified wages?
Qualified wages are the amount that you pay someone to do their job. For example, if you pay an employee $20hr, and they worked 400 hours, you would have paid qualified wages of $8000; you can also consider and include any amounts you paid for health insurance for that employee. You cannot include any wages you used for any other payroll-based credit or program reimbursing you for wages paid. So that would consist of wages paid for the qualified paid sick and family leave credit, also same with PPP.
Can I claim the ERC (Employee Retention Tax Credit) if I received the PPP loan?
Yes, this was changed in December 2020 per the taxpayer certainty and disaster tax relief act. You can take the ERC even if you got the PPP, but you cannot include qualified wages for the ERC that were wages that were included for the PPP loan period.
We hope you learned a lot regarding the employee retention tax credit. By staying informed, seeking professional advice, and taking advantage of available relief programs, business owners can mitigate the financial impact of the pandemic and pave the way for a more robust recovery. Want to work with one of our ERC Specialists? Fill out the form today or click here to apply for your Employee Tax Credit.