The pandemic hit businesses hard due to government shutdowns and lockdown orders. Many businesses were forced to temporarily close their doors or reduce their operations. As a result, many employees were either laid off or had their hours reduced.
The federal government enacted the Employee Retention Credit (ERC) to help businesses keep their workers employed during the pandemic. The credit was worth up to 70% on the first $10,000 of wages for eligible employees. The ERTC, similar to the PPP loan, has continued to provide a much-needed lifeline to businesses and employees during these difficult times.
Initially set to expire on January 1, 2022, ERTC expiration was back up to October 1, 2021, after the enactment of the Infrastructure Investment and Jobs Act. Unfortunately, this means the ERC will not be applicable in Q4 2021 or beyond. But fortunately, businesses that haven’t claimed the credit yet can still do so by amending prior returns within three years after the date of the returns.
An Overview of Employee Retention Credit (ERC)
The Employee Retention Credit is a refundable tax credit for eligible employers that helps offset the cost of retaining employees during the COVID-19 pandemic.
The credit is worth up to 70% of the first $10,000 of qualified wages (including allocable qualified health plan expenses) paid to each eligible employee. The credit is available for wages paid from March 13, 2020, through October 2021.
To be eligible for the credit, businesses must have experienced a full or partial shutdown due to a COVID-19 lockdown order OR a significant decline in gross receipts (i.e. decrease of more than 50% when comparing any quarter in 2020 to the same quarter in 2019).
How to Claim the ERC Credit
To claim the ERC credit, eligible employers must complete and file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for each quarter in which they wish to claim the credit.
Businesses can also elect to receive advance payments of the credit by reducing their federal tax deposits. To do so, businesses must complete and submit Form 7200, which is the Advance Payments of Employer Credits Due To COVID-19.
Key attributes of the ERC
- ERC rate is 70% of qualified wages, which translates to a maximum credit of $7,000 per employee per quarter for 2021.
- Businesses with PPP loans are also eligible for ERC if certain prerequisites are met.
- Employees do not need to be working to be eligible for the credit.
- Qualified wages include wages paid after March 12, 2020, and before October 1, 2021.
- The credit is refundable, meaning businesses can receive a refund even if they have no tax liability.
- Eligible businesses include those that were forced to shut down or reduce operations due to a COVID-19 lockdown order OR experienced a significant decline in gross receipts.
- The credit is available for each quarter in which the business meets the eligibility criteria, including universities, colleges, hospitals, and medical care providers.
- Businesses can elect to receive advance credit payments by reducing their federal tax deposits.
- If your business started operations after 2020, you may compare 2021 quarterly gross receipts to the same 2020 quarters to determine eligibility.
- Self-employed people are not eligible for the credit.
- Partners in partnerships and S corporation shareholders who receive guaranteed payments are considered employees and are eligible for the credit.
How Will The Expiration Of The ERC Impact Businesses?
The expiration of the ERC will have a significant impact on businesses, as they will no longer be able to claim the ERC credit to help offset the cost of retaining employees. Businesses that have not yet claimed the credit will need to do so by amending their prior returns within three years after the date the return was due.
The expiration of the ERC will also impact businesses that have been relying on the credit to help them stay afloat during these difficult times. With the credit no longer available, these businesses will need to find other ways to retain their employees.
This presents one of the many challenges that businesses are facing as a result of the COVID-19 pandemic. Ultimately, businesses will need to continue adapting and finding new ways to overcome these challenges.
Claim the ERC Credit
Despite the unforeseen early sunset of the Employee Retention Credit (ERC), businesses can still take advantage of the credit by amending their federal return to the IRS for any prior quarters in which they were eligible but did not claim the credit. To do so, businesses will need to file an amended return within 3 years after the date the return was due.
Think you’re eligible for the ERC and other credits from past returns? Schedule a free call to see how the professionals at Tri-Merit can help.