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Do You Qualify for the Employee Retention Credit? Find Out Now

mattlevy
Matthew Levy Updated: July 2, 2023 • 5 min read
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The Employee Retention Credit (ERC) is a tax credit aimed at small businesses that kept their workers employed during the COVID-19 pandemic. If your business operations were disrupted by government restrictions and you lost money, you may be able to get up to $26,000 back from the IRS per employee.

ARTICLE KEY POINTS:

  • To determine if your small business is eligible to claim the Employee Retention Credit, begin by checking if your business had 100 or fewer employees in 2019 for the 2020 ERC, or 500 or fewer employees for the 2021 ERC.
  • Next, assess if your business operations were limited or suspended due to COVID-era government restrictions like shutdowns and quarantines.
  • Afterwards, evaluate if your business experienced a significant decline in gross receipts compared to the same quarter in 2019. If your business meets these qualifications, you may be able to claim up to $26,000 per employee. 

Keep reading to understand how to determine if your business qualifies. For guidelines specific to your business, consider consulting a tax professional or ERC expert.

Determine if You Qualify for the Employee Retention Credit

To determine if your small business qualifies for the ERC, take a look at each of these eligibility buckets.

1. Count Your Employees

To qualify for the Employee Retention Credit (ERC) for the 2020 tax year, your small business should have had 100 employees or fewer in 2019. For the 2021 ERC, eligibility was extended to include employers with 500 or fewer full-time employees.

If your business had more than 500 full-time employees during the pandemic, you can only claim the ERC for employees who received wages but did not perform any work.

The ERC credit you can claim is closely linked to how much money you paid to your employees during the peak pandemic years.

2. Understand Eligibility Criteria

Businesses that paid wages to their employees in 2020 or 2021 and were negatively impacted by the pandemic in terms of revenue can apply for the ERC.

To qualify for the Employee Retention Credit (ERC) in 2020, you need to meet the following criteria:

  • Your business was fully or partially shut down due to a government order at any time during 2020.
  • The gross receipts of your business in any quarter of 2020 declined by 50% or more compared to the same quarter in 2019.
  • You retained at least 80% of your employees on your payroll.

Claiming the ERC for 2021:

  • Your business operations were partially or fully suspended due to a COVID-19-related government order in 2021.
  • Your business must have experienced a decline in gross receipts during a quarter in which the gross receipts were less than 80% of the same quarter in 2019.
  • You kept 80% or more of your workers employed.

Eligibility to claim for the third and fourth quarters of 2021:

  • Eligibility was expanded to include "recovery business startups.
  • These are businesses that began operating after February 15, 2020 and that had gross receipts for each quarter of less than 90% of the gross receipts from the corresponding quarter in 2019.

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3. Evaluate Wages Paid

The ERC credit you can claim is closely linked to how much money you paid to your employees during the peak pandemic years.

"Qualified wages" include payments made to employees, as defined by the IRS as cash wages (whether salaried or hourly), vacation pay, tips that total over $20 per month as well as certain health insurance expenses. 

  • 2020 Wage Criteria:

If you had a small business with 100 or fewer full-time employees in 2019, include all wages you paid to your employees in 2020, even if they weren't able to work due to pandemic restrictions.

For small businesses to be eligible to claim the Employee Retention Credit (ERC) in 2020, the maximum wage amount paid to employees is $10,000 per employee. This means that only the first $10,000 of qualified wages paid to an employee during 2020 can be considered for the credit. The credit is calculated as 50% of qualified wages, so the maximum credit amount per employee would be $5,000.

  • 2021 Wage Criteria:

If your business has 500 or fewer full-time employees in 2019, you can consider wages paid to your employees as qualified wages for the Employee Retention Credit when your business operations were fully or partially suspended due to COVID-19-related government orders.

For 2021, the maximum wage amount paid to employees for small businesses to be eligible for the ERC is $10,000 per quarter. This means that only the first $10,000 of qualified wages paid to an employee during each quarter of 2021 can be considered for the credit. The credit percentage has increased to 70% for qualified wages in 2021, allowing for a maximum credit amount of $7,000 per quarter, per employee.

Note that wages from other government programs, like the Paycheck Protection Program (PPP) can't be counted as qualified wages for the ERC. 

4. Review Interaction with Other Relief Programs

According to IRS Notice 2021-23 and Notice 2021-49, eligible businesses can claim the ERC even if they have received Paycheck Protection Program (PPP) loans. However, the same wages cannot be used for both the ERC and PPP loan forgiveness. A qualified ERC professional can help you make the determination. 

5. Maintain Proper Documentation

Documentation is key when claiming the ERC. Businesses must keep records substantiating the collection of receipts and the payment of qualified wages. Moreover, you should consider consulting with a professional advisor to ensure your business maintains proper documentation and meets all the requirements for the ERC.

After going through these steps, if you believe your business qualifies for the ERC, the next move would be to prepare and submit your claim by filling out IRS Form 941, the Employer's Quarterly Federal Tax Return.

Which Business Are Not Eligible for the ERC?

It's important to know that not all businesses are eligible to claim the Employee Retention Credit. Self-employed people that don't pay wages to employees and government entities are not eligible to apply. Additionally, if your business was not impacted by COVID-19 shutdowns, for example, if you ran an essential business, you'll likely be unable to claim the credit. 

Conclusion

In conclusion, determining eligibility for the ERC involves understanding the criteria, determining your business's employee count, evaluating qualified wages, reviewing the interaction of the ERC with other relief programs, and maintaining proper documentation. Given the complexity of the process, businesses are encouraged to consult with professional advisors to ensure they meet the requirements and maximize their potential credit.

mattlevy
Written by Matthew Levy

Matthew is a freelance financial copywriter with 14+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.