Business Finance

Answers to Employee Retention Credit FAQs

Jul 18, 2022 • 5 min read
employee retention tax credit pandemic
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      Have you heard of the Employee Retention Credit (ERC)? For business owners who endured the COVID-19 pandemic and the economic roller-coaster it brought, the ERC was meant to provide financial relief and keep their workforce employed. Now, even though the economic impacts of the pandemic have subsided, business owners like you can still take advantage of this tax credit. To find out if you qualify and how the Employee Retention Credit works, read our answers to the Employee Retention Credit FAQs below.

      What Is The Employee Retention Credit (ERC)?

      The ERC is a tax credit. This means, when applied, the ERC will reduce the total amount of taxes a business owes to the Internal Revenue Service (IRS). The ERC was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) which was passed in March 2020 by the U.S. Congress. It was intended to lessen the pandemic’s economic impact on businesses and encourage them to retain employees as much as possible. 

      The ERC is a fully refundable tax credit. This means, that if your business’ ERC is greater than your federal employment taxes, it could create a negative federal tax liability for a business and result in a tax refund. At the very least, it could lower the amount of taxes your business pays—at most, you could receive a refund check. 

      Am I Eligible For The Employee Retention Credit?

      To be eligible to receive the Employee Retention Credit, you must meet the following criteria:

      • Your business is a private sector or tax-exempt organization that carried out business in 2020 and/or 2021. 
      • Your business paid qualified wages to employees in 2020 and/or 2021.
      • Your business experienced hardship in one of the following areas:
        • You were forced to suspend your business’s operations, including limiting commerce travel or group meetings, fully or partially due to COVID-19 government orders, or
        • You experienced a significant decline in gross receipts beginning in the first quarter of 2020.

      Since you’ll be required to prove your business’s eligibility, knowing the definitions of a partial business suspension or a significant decline in gross receipts is critical.

      A partial business suspension is one in which total employee hours fall below 10% of the business’ typical total employee hours. An example of a partially suspended business would be a restaurant that could no longer welcome dine-in customers but continued to provide carry-out or delivery services. For more details on full vs. partial suspension of business, click here.

      A significant decline in gross receipts is when a business’ gross receipts started dropping in the first quarter of 2020 to 50% or less of the gross receipts of the business in the first quarter of 2019. For more details on the definition of a decline in gross receipts, visit the IRS page on the topic.

      What Exceptions Or Restrictions Should I be Aware Of In The ERC?

      A few other exceptions exist to the guidelines above. For example: 

      • Self-employed individuals may not claim the credit based on their earnings, but they can for wages paid to any employees they may have. 
      • Certain tribal government organizations or entities might be considered eligible. 
      • Businesses that received Paycheck Protection Program (PPP) loans from the government can claim the tax credit, but not for wages that were paid using a PPP loan.
      • Businesses that receive tax credits under the Families First Coronavirus Response Act (FFCRA) employer-paid leave requirements can’t count qualified leave wages in their ERC calculations. 
      • Businesses cannot count wages they’ve attributed to the R&D tax credit in their ERC calculation.

      For more information on these and other exceptions, visit the IRS page on this topic.

      How Is The Employee Retention Credit Determined?

      A business’ ERC amount is determined based on its qualified employee wages and the year in which those wages were paid. Here’s how it works:

      • For wages paid from March 13 to December 31, 2020, the tax credit is worth 50% of qualified employee wages. The highest amount that would be considered qualified employee wages for any one employee is $10,000 for the entire year. Following that math, the maximum credit a business can get per qualified employee is $5,000 (i.e., 50% of $10,000). 
      • For wages paid in 2021, the tax credit is higher: 70% of qualified employee wages. The highest amount of qualified wages paid that would be considered for any one employee is also larger: $10,000 per month. Therefore, the maximum credit a business can receive for 2021 is considerably larger than for 2020. Important note: businesses can claim the credit for the first three quarters of 2021 only, not the fourth.

      It’s worth noting here that qualified health plan expenses—defined as amounts paid or incurred by the business that are allocable to employees’ qualified wages to provide and maintain a group health plan, but only as they are excluded from employees’ gross income—are also factored into these wage figures.

      To get the full details on how the ERC is determined, visit the IRS page on the topic.

      Can I Still Take Advantage Of The ERC?

      Yes. If you want to take advantage of the 2020 ERC, you can apply until April 15, 2024. Likewise, the 2022 ERC will not lapse until April 15, 2025.

      How Do I Apply For The ERC?

      To apply for the Employee Retention Credit, you should file an amended Form 941X as part of your quarterly federal tax return for any 2020 or 2021 quarter in which your business was eligible for the ERC.
      The Employment Retention Credit is a potential financial benefit that no business owner can afford to pass up. However, to ensure that your business qualifies for this tax credit and secures the full credit amount it’s entitled to, we strongly recommend working with ERC experts, such as Lendio’s ERC partners.

      See If You Qualify For The ERC

      Lendio’s easy-to-use ERC application is designed to simplify the process at every step. 

      The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our bloggers or authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything. The information provided in this post is not intended to constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter.
      About the author
      Marcus Varner

      Marcus Varner is a content strategist and writer who specializes in articles, ebooks, video, etc., that empower readers to successfully tackle critical topics in marketing, small business, lending, technology, and work management.

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