The employee retention credit (ERC) is a fully refundable tax credit against payroll taxes originally enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Its purpose was to encourage employers to continue paying employees despite financial hardship caused by the COVID-19 pandemic. Even if your quarterly Forms 941 (the federal tax returns for employers) have already been filed, you may still be able to amend them to take advantage of the credit.
How Complicated ERC Rules Work
The rules surrounding the ERC are quite complex, in part because the regulatory framework stems from multiple statutes and IRS notices and the agency hasn’t provided clear, sufficient guidance. Furthermore, some of the rules have changed since their inception. For example, the Infrastructure Investment and Jobs Act enacted on November 15, 2021, retroactively eliminated the credit for wages paid after September 30, 2021.
Eligibility. Your business may be eligible for the ERC if it experienced any of the following:
- A “significant decline in gross receipts” amounting to 50% for quarters in 2020 and 20% for quarters in 2021 (with both compared to the same quarter in 2019);
- Full or partial suspension of business operations (more than a “nominal” amount) because of a government order triggered by COVID-19; or
- Full or partial suspension of business operations (more than a nominal amount) caused by the inability to obtain goods and materials from a supplier because a government order during the pandemic forced the latter to suspend operations.
Credit amount. For 2020, the ERC was 50% of “qualified wages” up to $10,000 in wages per employee for the year (i.e., up to $5,000 per employee for the year).
For 2021, the credit changed to 70% of qualified wages up to $10,000 in wages per employee per quarter (i.e., up to $21,000 per employee for the year).
Other Considerations
Here are some other items you’ll need to keep in mind when analyzing eligibility and calculating the amount of the ERC:
- What can be included in “gross receipts” and “qualified wages”;
- Related party aggregation rules and the consequences of aggregation;
- Limitations caused by the average number of full-time employees;
- Double-dipping with other credits and benefits; and
- Amending your income tax returns for the reduced deduction for wages.
To find out whether you’re eligible for the ERC or get help with calculating the amount and filing a claim, contact Goosmann Law Firm attorney Maggie Simonson at simonsonm@goosmannlaw.com. Note: The tax laws discussed above have been summarized and should not be relied upon for compliance with the Internal Revenue Code or any federal or state tax laws.