The Consolidated Appropriations Act of 2021 was enacted to provide relief to individuals and businesses as the world grappled with a healthcare emergency. This Act is an expansion of the Employee Retention Credit (ERC) that was introduced under the CARES Act. Due to the complex nature of the policy, there has been a lot of confusion regarding who is eligible for the ERC payroll retention credit. The questions listed below may help determine your eligibility.
1- What businesses or employers are eligible for the ERC?
To be eligible for the Employee Retention Credits, the organization must be carrying on business in 2020 and meet either of the following criteria
- Complete or partial suspension due to a government order
- Significant decline in gross receipts
2- How is a ‘significant decline’ in gross receipts defined?
- ERC 2020- During this period, a ‘significant decline’ implies a quarterly revenue decline of more than 50%. This comparison is based on the revenue generated in the previous year.
- ERC 2021- For companies applying for ERC 2021, a quarterly revenue decline of more than 20% should be noted. This decline is also compared to the revenue from 2019.
- For companies that became operational in 2019, the period (quarter) during which the business started functioning is considered the basis for determining quarterly revenue decline until the company reaches one year of operations.
3- Who can the business claim ERC for?
Small employers can claim ERC on all employee wages. For others, this credit can only be claimed on the salaries paid to employees for not working.
In addition, wages paid to certain related parties and owners are limited, and family members such as children, siblings, parents, and grandparents are ineligible for this credit. This is also detailed by the IRS under their FAQ section, according to which the following entities are ineligible for ERC-
- A brother or sister
- A child or grandchild
- Step-brother or step-sister
- The father, mother, or an ancestor of either
- A stepfather or stepmother
- A niece or nephew
- An aunt or an uncle
- Individuals the employee is related to by marriage
4- How is a ‘small employer’ defined under the ERC policy?
To gain retention credits under the 2020 ERC rules, a ‘small employer’ was defined as having 100 or fewer full-time equivalents (FTE) on your payroll. Under 2021 ERC, this definition was extended to include up to 500 FTEs. The comparison in both scenarios is 2019 employment.
In any case, a full-time employee is defined as an employee who, on average, works at least 30 hours per week or at least 130 hours of service during a particular month.
5- What are the wages eligible for ERC?
Qualified wages under this rule include gross wages and employer health costs. For 2020, the qualified wages were capped at $10,000 per year per employee, and this cap was extended under the 2021 rules to $10,000 per quarter per employee.
Additionally, wages that were used to claim ERC could not be used for other credits such as Research & Development Credit (Section 41), Work Opportunity Tax Credit (Section 51), Employer Wage Credit for Active Duty Members (Section 45P), Indian Employment Credit (Section 45A), Employer Credit for Paid Family and Medical Leave (Section 45S), and Empowerment Zone Employment Credit (Section 1396).
6- How much ERC can be earned per year (2020 and 2021)?
According to the rules for ERC in 2020, the credit amount was 50% for qualified wages up to $10,000 for the entire year. The maximum credit employers earned during this time was $5,000 per employee.
With the cap increase in 2021, the credit amount rose to 70% of qualified wages up to $10,000 each quarter. However, this credit only applied to the first two quarters of the year that ended on June 30, 2021. Thus, according to this rule, employers qualified for up to $14,000 credit per employee.
7- How is ERC claimed?
The ERC should not be considered an income tax credit. Rather, it is a payroll tax credit that directly reflects on Form 941. For individuals who still have not claimed the ERC tax credit in 2023, it can be claimed retroactively in the form of a refund from the IRS by filling out Form 941-X (Modified Employer’s Quarterly Federal Tax Returns or Request for Refund) for the applicable period. This form records your qualified earnings and accompanying credits for each calendar quarter that you qualify for.
8- How to claim credit for payroll retention?
The Employee Retention Tax Credit (ERTC) is a tax credit for companies that lost income in 2020-2021 due to a public health emergency. Under this rule, eligible employers can get up to $7,000 for each employee per quarter for four quarters, bringing it to $28,000 per employee. The credits may be claimed by reducing employment tax contributions by the projected credit amount.
The initial date for the ERTC retroactive period was January 1, 2022, but was pushed back to October 1, 2021. Although it offers multiple benefits to organizations, only a few companies applied for these credits. However, those who did not apply for credit earlier can claim a retroactive refund now. This applies for up to three years after the initial filing date.