How Does Employee Retention Credit Work?
The ERC gives employers a major opportunity to get a payroll tax credit
11 Min
You need to know exactly what has changed since the ERC was introduced in 2020 so you can claim your accurate credit right away. Here are a few frequently asked questions about ERC updates and how to ensure you’re eligible to claim the credit:
The ERC was initially applicable through 2020, but pandemic relief legislation extended it into 2021. Eligible employers can now claim the credit through September 30, 2021, and recovery startup businesses can claim the last quarter of 2021 as well. The ERC was not extended for 2022 or 2023.
The government significantly increased the potential ERC employers can receive in 2021. For 2020, the maximum ERC is $5,000 per employee per year. For 2022, the maximum ERC is $7,000 per employee per quarter, so the total maximum for the year is $21,000 per employee (or $28,000 per employee for recovery startup businesses). This is because the credit was increased from 50% of qualified wages, up to $10,000 per year, to 70% of up to $10,000 per quarter in 2021.
The initial rollout of the ERC restricted loan holders under the Paycheck Protection Program (PPP) from claiming the ERC. Subsequent legislation changed this rule, however – you can now claim the ERC if you received a PPP loan, but you cannot use the same wages that PPP funds paid for to calculate your employee retention credit.
ERC updates have also impacted how to measure losses in gross receipts. In 2020, businesses had to have lost at least 50% of gross receipts in a quarter compared to the same quarter in 2019. In 2021, businesses had to have lost at least 20% of gross receipts in a quarter compared to the same quarter in 2019.
The other qualifying factor was unchanged with the law updates – you can qualify for 2020 or 2021 if you partially or fully had to close your business because of a government order.
There is no indication that the ERC will extend past its current end date of 2021. Remember that if you are eligible, however, you can still claim the ERC for 2020 or 2021. Make sure you claim the ERC right away, as you only have three years from the date you initially filed your tax return.
Any claims you can now make for the ERC are for past quarters. You will need to file an amendment to claim the ERC using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Provide all applicable information on the form and indicate which quarter you’re applying for. You will need to send the IRS a separate Form 941-X for each quarter you’re retroactively claiming the ERC.
The IRS has warned employers to watch out for third parties who lead them astray just to get paid. Being aware of these scams is the first step. You should also do your research to determine if you’re eligible for the ERC.
Be wary of any advisor who tells you you’re eligible after you have figured out that you’re ineligible. Always ask the tax professional to provide you with any relevant certifications for their practice. Read reviews and pay attention to gut feelings that someone is being dishonest with you.
Most importantly, avoid any payment structure where you agree to give the person a portion of your employee retention credit upfront. They could then falsely increase what you claim to get a bigger check from you.
Start the filing process as soon as you realize you’re eligible for the ERC. Remember to closely evaluate your books for the 2020 and 2021 quarters to see if your gross receipts qualify. Always talk to an experienced, legitimate tax professional if you have questions about how to claim your credit.
