Employee Retention Credit FAQ
Small business owners are asking about the Employee Retention Credit (ERC). Is my business eligible? Which employees qualify? How much can I get? Is it too late? The ERC is very, very complicated and I wish it weren’t.
The IRS and Congress have updated the rules for the ERC numerous times during the last year making it very complicated to calculate. Regardless, we encourage you to see if you qualify, since it is free money. We are hoping our Employee Retention Credit FAQ that will help you answer most of your questions.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable credit that was created by the Covid Aid Relief, and Economic Security (CARES) Act. It was created to encourage small businesses to keep people employed during COVID. In order to qualify for the ERC you must have paid your employees “qualified wages” during 2020 or 2021.
How do I qualify for the Employee Retention Credit?
As mentioned above, Congress and IRS have updated the rules many times, and there are different qualifications per year. We will break down the most common parts below:
Tax Year 2020
You may be eligible for up to $5,000 for each full-time employee you kept on payroll during March 13th, 2020 thru December 31st, 2020. Your business must’ve had a decrease in at least 50% of Gross Receipts when compared to the same quarter in 2019. If your business did not meet the 50% Gross Receipts Test, you may still be eligible if you had a mandatory full-or-partial government shutdown. An example is, if a restaurant had to completely close, or could only be at 25% capacity, per governor’s order.
Tax Year 2021
You may be eligible for up to $7,000 for each full-time employee you kept on payroll during January 1st, 2021 thru September 30st, 2021. Your business must’ve had a decrease in at least 20% of Gross Receipts when compared to the same quarter in 2019 (or a 20% reduction in Gross Receipts when comparing the immediate preceding quarter to 2019). If your business did not meet the 20% Gross Receipts Test, you may still be eligible if you had a mandatory full-or-partial government shutdown. However, you cannot use wages you paid with PPP money (the government says no double dipping).
Special Rules you need to be aware of that may or may not make you eligible:
- The number of employees you had are over 100 in 2020, or 500 in 2021,
- If your company started after February 15th, 2020,
- Your small business has related parties (e.g. multiple entities) they may need to use the aggregation rules and could be treated as a single employer for purposes of calculating the ERC.
- If you received the Family Sick Leave Credit or WOTC credit
- Severely Financial Distressed employers may get additional benefits to qualify in Q3 or Q4 of 2021
Note: President Biden signed the Infrastructure Investment and Jobs Act on November 15th. ERC is no longer available in Q4 of 2021 unless you’re a “Recover Startup Business”. A Recovery Startup Business is one that began after 2/15/2020, has under $1M in gross receipts, and at least 1 employee.
How do I apply for the ERC?
Since the Employee Retention Credit is an employment tax credit, you must applied for it on your payroll tax return that your payroll company prepares. There are three (3) different ways you may apply for the refund of the ERC, you may either:
- Apply on your current quarterly payroll return, Form 941. You will need to contact your payroll company to see how they handle the reporting),
- File an amended return, Form 941-X, either your payroll company or CPA can help you with this,
- Ask for an advanced request for the ERC, on Form 7200
What are Qualified Wages for the ERC?
Wages that are subject to social security and medicare (FICA) are considered qualified wages. Additionally, you may include certain health care expenses (employer paid health insurance premiums) as qualified wages.
Employee Retention Credit Owner’s Wages
A common question I get asked is, “Do owner’s wages count for the employee retention credit?”
If you are an owner that owns over 50% of the business, in general, your wages don’t qualify.
You must also use the attribution rules if you are a married couple. Here is an example: Adam, Betty, and Charlie own an S-Corporation, 33.33% each. Adam and Betty are married, so they meet the attribution rules test. Therefore, together they own 66.67% and their wages do not qualify. However Charlie, who only owns 33.33%, his wages do qualify.
Additionally, any family members of 50%+ owners also do not qualify (e.g. children, siblings, parents, step-siblings, etc.) So if your children are employees of the Corporation, and you own 50%+, their wages do not qualify.
Special Rule for no living relatives – honestly, I can’t make this stuff up!
If you own over 50% of a Corporation, and you have no living relatives, you may be able to use the Owner’s Wags to qualify for the Employee Retention Credit.
As you can read above, the ERC is extremely complicated. Depending on when you opened your business, the number of employees, you had, if you meet the Gross Receipts Tests, etc. You may or may not be eligible for the ERC. Additionally, the IRS has written five (5) different notices updating and making changes to the ERC over the last 18 months. Due to the complicated nature we highly recommend you check with your accountant or CPA to see if your specific circumstance qualify your small business for this credit.