There Is Still Time to Claim the Employee Retention Credit
Though Covid-19 will be here for the foreseeable future, to a large degree the gravity of Covid’s effects on small businesses have lessened. Many that were shuttered or experienced revenue declines during the worst of the pandemic have recovered.
Covid has had an unequal impact on small businesses—oftentimes due to differences in industry; the level of Covid restrictions in specific areas; or the business’s ability to adjust to changes in laws, regulations, and circumstances. With respect to my own small business clients, the impacts of Covid ran the gamut. Some of my clients experienced no negative business impacts from Covid—in fact, some actually had their best years ever. Other businesses experienced challenges during certain points, but were able to weather the storm and retain their employees through assistance from Small Business Administration (SBA) programs (one or two draws of forgivable Paycheck Protection Program (PPP) Loans or through Economic Injury Disaster Loans (EIDL) that must be repaid). But to my knowledge, as of the writing of this article, I am not aware of any of my clients who have claimed the Employee Retention Credit (ERC). If you would like to find out whether you missed claiming a valuable credit that you may have been potentially eligible for, read on!
What Is the Employee Retention Credit (ERC)?
The ERC is a fully refundable tax credit that was created in March 2020 under the CARES Act. It allows employers most impacted by Covid to receive financial incentives for retaining their employees. ERC is probably the Covid relief program that small business owners know the least about, and as a result many small business owners did not take advantage of it. Another reason many taxpayers have not taken the ERC is because the rules have changed so many times that under the original rules a taxpayer may not have been eligible, but now that the subsequent amendments were enacted, the taxpayer’s eligibility may have changed. The ERC can amount to 50% of an employee’s qualified wages in 2020 (up to $10,000 of qualifying wages per employee per year—i.e. a maximum credit of $5,000 per employee per year) and was expanded to up to 70% of an employee’s qualified wages in 2021 (up to $10,000 per employee per quarter—potentially up to $7,000 per employee per quarter). For businesses that qualify, the ERC can result in a significant tax refund.
What Businesses are Eligible for ERC?
Small businesses who were impacted by a government shutdown in a quarter of 2020 or 2021 or who had a significant revenue decline (i.e. gross receipts were 50% less in a particular quarter in 2020 compared to that same quarter’s revenue in 2019, or gross receipts were 20% less in a particular quarter in 2021 compared to that same quarter’s revenue in 2019) may be eligible for ERC if they paid eligible employee wages. Originally, businesses who took PPP loans were not eligible for ERC, but this was one of the qualifiers that was subsequently amended. Now the requirement is that you may not use the same wages for ERC that were used for PPP loan forgiveness. So for small business owners who have taken only one PPP draw or none at all, it may be worth looking into whether you qualify for ERC for certain quarters in which you experienced business difficulty in 2020 or 2021. In fact, there are even scenarios by which a small business owner who took two PPP draws may still potentially be eligible for ERC.
Important to note is that wages paid to majority owners (50% or more ownership) in a business, or employees related to 50% or more owners (i.e. spouse, children, parents, those in the same household as the taxpayer, etc.) are generally not eligible for ERC (though there are very narrow exceptions that do not apply to most taxpayers).
How Do Eligible Taxpayers Claim ERC?
Eligible taxpayers claim ERC by filing amended Forms 941 (Forms 941-X) for the quarters in which they are eligible. Taxpayers have within 3 years of the original due date of that Form 941 to amend and claim the ERC for that quarter. For taxpayers who may realize now that they qualify for ERC and wish to claim it, important to note is that you cannot claim a credit and a deduction for the same wages. So taking the ERC at this stage would require filing an amended income tax return as to wages that were deducted on that return that you are now using for the ERC. But for most taxpayers, credits are more valuable than deductions, so it could potentially be worth the time, expense, and effort of filing the amended payroll tax returns and income tax returns overall depending on the amount of the potential credit.
How to Read More About ERC
Because I am only offering a brief overview of ERC in this article, you may wish to read further to find out whether you are eligible for ERC. You can access the IRS’s frequently asked questions on ERC at this link: https://www.irs.gov/newsroom/covid-19-related-employee-retention-credits-general-information-faqs As mentioned previously, most of my current tax clients are not eligible for ERC, based on what I know about their operations—due to exclusions for majority owners, the requirement of a government shutdown, having wages subject to PPP loan forgiveness in the applicable quarters, and/or the tough revenue tests. I have personally notified all my continuing tax clients that I thought might potentially qualify for ERC via email. However, because I don’t prepare my clients’ payroll or file their 941’s (only in very rare circumstances), the ERC is not a credit for which I would handle the filing under an ordinary circumstance. So, if after reading this article, you feel that your small business might be eligible for ERC, I would highly recommend looking into it before the statute of limitations expires on amending the relevant Form 941. Your payroll provider may offer assistance with ERC, or you may wish to use the plethora of companies that provide these services as a specialty.