What is ERC? How does the Employee Retention Tax Credit Work

The Employee Retention Credit (ERC), also known as Employee Retention Tax Credit (ERTC) is an IRS tax credit that was created to help businesses during the COVID-19 pandemic. It was established as a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and was designed to reward companies that kept employees on their payroll during tough times and offered cash-struck businesses a significant financial boost during testing times.

While ERC is a game-changer for businesses, it is important to understand it completely to seek maximum benefits and avoid potential scams.

What is Employee Retention Credit (ERC)?

The IRS Employee Retention Credit is a U.S. Federal tax credit scheme for businesses and Tax-Exempt organizations that were negatively impacted by the COVID-19 pandemic. The credit was available for wages paid from March 12, 2020, to December 31, 2021. Eligibility and credit amounts vary depending on when the business impacts occurred.

The Employee Retention Tax Credit was designed to offset a portion of employee wages and its federal tax deposits, namely the deposits of federal withholding tax, employee Social Security tax, employee Medicare tax, employer Social Security tax, and employer Medicare tax.

For eligible employers, the credit can be a:

1. 2020 – 50% of qualified wages up to $10,000 per employee annually (maximum $5,000 per employee for the year),
2. 2021 – 70% of qualified wages up to $10,000 per employee per quarter (maximum $7,000 per employee per quarter).

Claiming ERTC: Is It Still Applicable?

While ERTC was introduced during the pandemic, it remains available for eligible businesses to claim retroactively. The IRS is still accepting Employee Retention Tax Credit claims. Though there was a moratorium on processing new claims filed after September 14, 2023, it was lifted as of August 8, 2023. Claims filed between September 14, 2023, and January 31, 2024, are now being processed.

Although the U.S. House of Representatives passed a bill proposing January 31, 2024, as the new deadline for filing ERTC claims, the Senate did not consider it, leaving the original end date to amend 2021 tax returns at April 15, 2025.

While you can submit a new claim, be prepared for potential delays in processing as the IRS works through a backlog.

Employee Retention Credit Eligibility

A company is eligible for the ERC if it satisfies at least one of the following requirements:

• Government-Ordered Shutdowns: You may qualify if government restrictions pertaining to COVID- 19 caused your business to close entirely or in part. This covers municipal or state regulations that restricted a business’s activities or resulted in its forced closure.

• COVID-19 Induced Decline in Revenue: You may potentially be eligible if the COVID-19 epidemic caused a notable decline in revenue for your company. For 2020, to apply for an ERC, a business required a 50% reduction in gross receipts compared to the same quarter in 2019. In 2021, a 20% decline was enough to meet the requirement.

• Recovery Startup Businesses: If you started a business after February 15, 2020, and had average annual gross receipts of $1 million or less, you may also qualify under this special category.

What Are the Limitations of the ERC?

Some limitations to keep in mind when applying for ERC include:

• Paycheck Protection Program (PPP): You cannot claim the ERC on wages that were also covered by PPP loan forgiveness. In other words, you cannot “double-dip” by using the same wages for both programs.

• Other COVID-19 Relief Programs: The same rule applies if your business received other pandemic-related relief, such as the Restaurant Revitalization Fund or Shuttered Venue Operators Grant.

How to Claim ERC?

Claiming the ERC isn’t automatic—you have to file an amended tax return Form 941-X (the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund) in case you didn’t claim the credit when they filed their original employment tax return Form 941. This form allows you to go back and claim the ERC for any eligible wages paid during the pandemic.

Once you’ve submitted the form, you will receive the credit either directly or as a refund – if you’ve already paid your payroll taxes.

Avoiding ERC Scams

While employee retention tax credit is a legitimate tax credit, there are a number of scams around ERTC. The common ones include:

• Unsolicited Offers: Be wary of unsolicited calls, emails, or messages from people claiming they can get you an ERC refund quickly and easily. Scammers often use high-pressure tactics to get you to act fast without verifying your eligibility.

• Upfront Fees or Percentages of Refund: Certified tax professionals will typically charge flat fees or by the hour for their services. Be cautious of anyone asking for large upfront payments or a percentage of the ERC refund.

• Guaranteed Refunds: If someone tells you that “every business qualifies” or guarantees a refund without fully reviewing your financial records, that’s a major warning sign. The employee retention credit is based on specific conditions. Not every business qualifies for it.

What to Do If You’ve Filed a Fraudulent ERC Claim

If you realize you’ve filed an ineligible employee retention credit claim, it’s important to take corrective action quickly:

• Withdraw the Claim: If the IRS hasn’t processed the claim yet, you can withdraw it. This helps avoid tax penalties or interest on the funds.

• Return the Funds: If you’ve already received the ERC payment, you can return it before cashing it.

• Voluntary Disclosure: The IRS has a voluntary disclosure program that allows businesses to correct false claims and repay any funds without facing severe penalties. This program allows participants to repay only 85% of the ERC they received as a credit on their return or as a refund.

Common FAQs on the Employee Retention Credit (ERC)

1. How Much is the ERC Per Employee?

For 2020: The maximum Employee Retention Credit per employee is $5,000. This credit covers up to 50% of qualifying wages, including health plan expenses, up to a maximum of $10,000 per employee annually.

For 2021: The ERC provides a higher benefit. For the first three quarters of the year, businesses can claim up to $7,000 per employee, per quarter, which totals up to $21,000 per employee for the year. This is calculated as 70% of qualified wages per quarter, with a cap of $10,000 in wages per employee, per quarter.

In total, businesses can potentially claim up to $26,000 per employee when combining both years.

2. Can You Claim Both Employee Retention Credit and PPP?

Yes, businesses can claim both the ERC and PPP loan forgiveness. Initially, this wasn’t allowed, but the Consolidated Appropriations Act (CAA) of December 2020 changed the rules, allowing businesses to benefit from both programs.

When applying for PPP loan forgiveness, businesses must ensure they don’t double-dip by counting the same payroll expenses for both the ERC and PPP loan forgiveness. This is a critical compliance requirement, and failure to adhere to it could result in penalties.

3. Is being subject to a government order enough to make me eligible for ERC? (added July 28, 2023)?

No. You need to demonstrate that the government order was related to COVID-19 and that it resulted in your trade or business being fully or partially suspended. 

4. Was my business or organization fully or partially suspended if I had a supply chain issue?

A supply chain issue by itself does not qualify you for the ERC.

The IRS provided a narrow, limited exception if an employer was not fully or partially suspended but their supplier was. The exception, however, only applied when the employer absolutely could not operate without the supplier’s product and the supplier was fully or partially suspended themselves.

In addition to having the supplier’s governmental order, you will need to show that:

• The government order caused the supplier to suspend operations,
• You couldn’t obtain the supplier’s goods or materials elsewhere (regardless of cost), and
• It caused a full or partial suspension of your own business operations.

Partner with Professional Tax Consultants to Maximize ERC Without the Risks

The Employee Retention Credit can provide substantial relief for businesses that were hit hard by the COVID-19 pandemic. However, understanding the qualifications and avoiding scams is essential. By leveraging professional tax planning and return preparation services, you can file your claim correctly and stay at the right side of the law.

Need help with your ERC claim? Reach out to our team today to ensure you’re getting the right guidance and avoiding any potential pitfalls.