However, to try and offset the economic slowdown, the government created several relief options designed to help businesses stay afloat. The most well-known of these was the PPP loan, but there is another important benefit businesses need to know about: the ERC tax credit.
What is the ERC tax credit?
The ERC tax credit—which stands for Employee Retention Credit—is exactly what it sounds like: a tax credit from the government issued to businesses who meet certain conditions.
Unlike the PPP, ERC funds are not a loan, and they do not have to be paid back or forgiven. Basically, once your business receives the money, it's yours to keep and use however you want.
The government created these tax credits as a way to encourage private employers to keep paying their workers throughout the pandemic, despite government shutdowns or financial losses.
By continuing to pay employees, businesses helped the economy keep chugging along. Now that the pandemic is over and the economy is restarting, ERC funds are available to help your business recover.
How to qualify for an ERC tax refund
In order for your business to be an ERC-eligible employer, it must meet one of the following three conditions:
Your business experienced a decline in gross receipts when compared to the same quarter in 2019
Your business experienced a full or partial shutdown due to government mandates
Your business experienced supply chain issues caused by government shutdowns of your suppliers or vendors
Now, one important thing to note about the gross receipts test is that the metric for how much they declined varies, depending on the year and/or quarter you're hoping to qualify for.
For 2020, your gross receipts must have declined by 50% or more when compared to 2019. In 2021, they only need to have declined at least 20% from 2019.
How the ERC refund works
Once you've determined that your business meets the eligibility requirements, the next step is to determine which employee wages qualify.
This determination primarily depends on the size of your business.
If you meet the ERC tax code's definition of a small business, you can include the wages paid to all of your employees, both full-time and part-time, in any eligibility period.
However, if your business is considered a large business under ERC law, the only qualified wages are those paid to employees for not performing any services.
So what are the exact numbers that determine if your business was a large or small one?
Well, it depends on which year you're trying to claim an ERC refund in:
2020 - To qualify as a small business when claiming 2020 ERC funds, you will need to have had 100 or less full-time employees in 2019
2021 - To qualify as a small business when claiming 2021 ERC funds, you must have had 500 or less full-time employees in 2019
So, as you can see, it's possible to qualify as a small business for claiming 2021 ERC funds and as a large business when claiming them for 2020.
The different rules for the different years can be a little bit complicated and confusing. That's why new businesses have been created solely to help others claim their ERC funds.
Maximizing your ERC refund requires extensive knowledge of the 200+ pages of legal code created for the ERC program, as well as a careful analysis of both your payroll tax return and payroll reports for 2020-2021.
You also can't double-dip benefits.
While it's possible for a business to receive both a PPP loan and ERC funds, you have to be really careful about how you claim wages if you're applying for PPP loan forgiveness.
Basically, full forgiveness of your PPP loan requires that you claim a minimum amount of payroll costs, and any wages used to meet that minimum cannot be claimed for an ERC refund.
How much ERC money your business can get
The good and bad news is that there is no hard-and-fast number here.
Even though that might sound frustrating, it actually just means there's no cap on how much you can receive! Instead, it depends on the number of employees you have with qualified wages for each of the eligibility periods.
But, to make things as simple as possible, here's a number we can give you: $26,000 per employee.
Basically, for each employee whose wages fully qualify in every available ERC period in 2020 and 2021, you can receive up to $26,000 dollars.
To know where we got that number from, you first need to know the rules set out in the ERC tax code for 2020 and 2021. Basically, these rules say:
You can claim up to 50% of the first $10,000 in wages paid to a qualified employee between March 13-December 31, 2020
You can claim up to 70% of the first $10,000 of wages paid to a qualified employee each quarter for the first three quarters of 2021
Now let's take these rules and turn them into actual numbers.
For 2021, 50% of $10,000 is $5,000. For 2021, 70% of $10,000 is $7,000. But since that's per quarter, and three quarters qualify, we actually need to multiply $7,000 by three, which is $21,000.
So, $5,000 for 2020 + $21,000 for 2021 = up to $26,000 that can be claimed per employee for your ERC refund.
To get the total amount you could qualify for, you now simply have to take the number of qualified employees and multiply it by $26,000.
Here's an example: if you have 200 employees whose wages fully qualify for 2020 and all three quarters of 2021, then your ERC refund could be as much as $5.2 million!
How to claim your ERC money
To claim your ERC refund, you will need to complete and file Form 941-X (Quarterly Federal Payroll Tax Return) for *each* quarter your business has qualified for.
Once they have these forms, the IRS can start reviewing and processing them. And if all goes well, they'll write you your check.
Just be aware that this part of the process could take awhile. Right now the IRS is still pretty back-logged on processing 941-X files. Because of this backlog, it's possible it could take up to 12 months or more for your check to arrive.
The good news is that the IRS is starting to make good progress in reducing their backlog, so the time could end up being shorter.
Also, don't let that wait deter you from filing. If you wait too long, you might miss the deadlines for filing and lose out on all that ERC money. You can file until:
April 15, 2024 for your 2020 ERC claims
April 15, 2025 for your 2021 ERC claims
Once these deadlines pass, you won't be able to file for an ERC refund, even if you would have qualified.
Find out how much your business could qualify for
Look, we all know the tax code is complicated. And the rules governing the ERC refund are no exception!
Not only are the requirements and calculations different for 2020 and 2021, but there are also other considerations, like the PPP loan, that you have to take into account.
Luckily, our specialists are ERC experts who know how to help you maximize your claim. So if you think you might qualify, give us a call for your quick, no-cost assessment.