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Employee Retention Credit FAQ - ERC Tax Credit Application

Employee Retention Credit FAQ
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by Bobby Léone

  • Last Updated: Nov 4, 2022

  • What is the Employee Retention Credit (CARES Act)? 

    Below are some of the Most Frequently Asked Questions (FAQ) about Employee Retention Credit (ERC):

    The Employee Retention Credit (ERC) is a refundable payroll tax credit program (stimulus) designed to help businesses retain their workforce during the Covid-19 pandemic.

    The government established through the CARES Act grant, not a loan you can claim for your business. The ERC is available to small and mid-sized companies based on qualified wages and healthcare paid to employees.

    What are the Employers Eligible for the Employee Retention Credit (ERC)? 

    Trade or business that experienced:

    A partial or full shutdown or a significant decrease in gross receipts of 50% for 2020 and 20% for 2021 from the same calendar quarter in 2019 and continues through the end of the first quarter, for which the business's gross receipts are greater than 80% of the comparable 2019 calendar quarter. Non-profits are eligible, but governmental entities are not.

    For 2021 business must have a significant decline in gross receipts of at least 20% compared to the 2019 calendar quarter (2020 if your company was not in business during the quarter in 2019). Employers may elect to use a prior calendar quarter rather than the current calendar quarter in determining if there was a significant reduction in gross receipts. 

    Governmental entities that are colleges or universities or whose principal function is providing medical or hospital care are eligible for credit.

    A recovery startup business is any employer that began trade or business after February 15, 2020, with gross receipts of less than $1 million.

    What Qualifies as Operational Change? 

    Here are some qualifying factors in determining if your company meets or qualifies for the Employee Retention Credit:

    1)  Change in business hours

    2)  Fully or Partially suspended company operations

    3)  Shutdowns or disruptions to your supply chain or vendors

    4)  Reduction of services you offered

    5)   Reduction in the workforce or a decrease in employee workloads

    6)   A disruption or slowdown in your business, such as a department or division closures

    7)   Your company's inability to visit a client's job site

    8)  Your suppliers or vendors were not able to make deliveries of critical goods or materials

    9)  Your business required additional spacing for employees and customers due to social distancing

    10) Change in job roles/functions

    11) Tasks or work that employees couldn't perform from home or while transitioning to remote work conditions

    12) Lack or inability to Travel

    13) Lack or inability to have Group Meetings

    How Do You Apply for the ERC Payroll Tax? 

    Companies can claim the Employee Retention Credit on their quarterly employment tax returns (IRS Form 941). Employers can apply the ERC against the employer's share of Social Security taxes owed. Employers use IRS Form 941-X to correct their quarterly employment tax returns.

    What Are Employee Retention Qualified Wages? 

    Includes health plan expenses paid on behalf of the employee if excluded from the employee's gross income. For small employers, defined as 100 or fewer full-time employees, qualified wages include wages paid to all employees. For large employers, defined as more than 100 full-time employees, qualified wages are limited to wages paid to employees who are not working.

    Qualified wages do not include wages for which FFCRA credits the business claimed or with forgiven PPP Loans (applies to Q2- Q4 2020). For 2021 qualified wages definition remained the same, except for expansion to 500 or fewer full-time employees for a small employer Q1 - Q4).

    Additionally, in 2021 under the American Rescue Plan, severely financially distressed employers may claim credit for wages paid to all employees even if the employer has more than 500 employees. A severely financially distressed employer is any employer whose gross receipts declined more than 90% in a 2021 calendar quarter compared to the same quarter in 2019.

    What Are the ERC Eligibility Credit Calculation Quarters? 

    The tax credit is available for each eligible employee that the employer retains; the credit is 50% of the capped $10,000 of qualified wages paid to that employee for Q2 - Q4 2020—up to 70% of qualified wages for Q1 - Q4 2021.

    The wages periods are from:

    March 13, 2020, through December 31, 2020 - Applicable law: CARES Act Section 2301, amended by the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) Section 206.

    January 1, 2021, through July 1, 2021 - Applicable law: Cares Act S2301, as amended by the TCDTRA S207 Supplemental guidance.

    July 1, 2021, through December 31, 2021 - Applicable law: The American Rescue Plan.

    What Are Considered Gross Receipts for ERC? 

    Gross Receipts Reduction

    Gross receipts reduction criteria are different for 2020 and 2021 and measured against the current quarter compared to 2019 pre-COVID amounts.

    No revenue decline. Do I still qualify?

    There are two ways to qualify:

    Either a change in your operations OR a revenue decline. You do not need a revenue decline to qualify; many businesses had a revenue increase and still qualified for ERC.

    A Business that had a Full or Partial Suspension of Company Operations or Business

    A government authority or agency that required a partial or full shutdown of your business operations during 2020 or 2021, which includes limited company operations of commerce, inability to travel, or restrictions of group meetings.

    Does the Employee Retention Credit Have to be Paid Back? 

    No, the tax credit does not have to be re-paid. Businesses can use the credit to offset the cost of employee wages and health insurance premiums.

    Can You Receive the ERC and a Paycheck Protection Program (PPP) Loan?

    Under section 206(c) of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, as an eligible employer, you can claim the ERC even if you have received a PPP Loan. Initially, PPP Loan recipients could not receive credit, which was changed retroactively by TCDRA.

    What Are Key Factors to Know About ERC Tax Credit? 

    1. The ERC is a refundable tax credit available to employers experiencing financial hardship due to the pandemic.

    2. The maximum tax credit is $26,000 per employee.

    3. You can claim up to $5,000 per employee for 2020.

    4. You can claim up to $7,000 per employee for 2021.

    5. You have 3 years to claim the credit.

    Employee Retention Tax Credit for Full Time Employees Only? 

    While the ERC is available to all businesses that meet the eligibility requirements, the tax credit is only available for companies with full-time employees.

    How Does a Business Claim the ERC Retroactively?

    ​If your business is eligible for the credit, you can claim it for each qualifying employee you retain on your payroll tax return. The payroll tax credit is available for wages paid from March 13, 2020, through December 31, 2020.

    How is the Employee Retention Credit Treated for Tax Purposes? 

    The simple answer is that IRS does not consider ERC for federal income tax purposes; however, you are required to reduce any deductible wage expenses accordingly by the amount of the credit. Business owners should provide the amount of credit information to their CPAs for tax purposes.

    Does It Take Long for the IRS to Process a Refund After Filing an Amended 941-X Form? 

    Refunds appear to vary in the processing time to receive an ERC payment, generally from 30 - 45 days but could take longer.

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