Tax Credits

Employee Retention Credit FAQ (2023)

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Employee Retention Credit (ERC) has emerged as a vital lifeline for businesses across the United States, particularly in the wake of economic challenges posed by the COVID-19 pandemic.

As the country strives to rebuild and recover, understanding the intricacies of ERC is paramount for employers seeking to maximize financial support while retaining their valuable workforce. This article aims to answer most of the Employee Retention Credit FAQs. From eligibility criteria to claiming procedures, we will delve into the key aspects of ERC, shedding light on how businesses can leverage this credit to navigate the evolving economic landscape and secure the future of their organizations.

Contents

What is the Employee Retention Credit (ERC)?

The Employee Retention Credit (ERC) is a financial incentive program introduced by the government to support businesses during times of economic distress, such as the COVID-19 pandemic. The ERC aims to encourage employers to retain their employees by providing a refundable tax credit. This credit is available to eligible employers who experienced either a significant decline in gross receipts or were subject to a full or partial suspension of operations due to government-imposed restrictions. The credit amount is calculated based on qualified wages paid to employees.

Who is qualified for the ERC?

To qualify for the Employee Retention Credit (ERC), businesses must meet the following criteria:

1) experience a significant decline in gross receipts (50% for 2020, 20% for 2021 and beyond),

2) be subject to a full or partial suspension of operations due to government-imposed restrictions.

A complete guide can be found here.

Which types of businesses are eligible to receive the Employee Retention Tax Credit?

Various types of businesses are eligible to receive the Employee Retention Tax Credit (ERC). This includes for-profit businesses of any size, such as corporations, partnerships, and sole proprietorships. Additionally, tax-exempt organizations, including nonprofit organizations, can also qualify for the ERC. However, there are some exceptions to eligibility. Government entities and small businesses that received Paycheck Protection Program (PPP) loans may be excluded from claiming the credit.

Are startups eligible for the Employee Retention Credit (ERC)?

Yes, startups can be eligible for the Employee Retention Credit (ERC) under certain conditions. New businesses and startups that commenced operations after February 15, 2020, have the potential to qualify for the Employee Retention Credit (ERC).

How are small and large businesses defined in terms of qualifying for the ERC?

In 2020, for the purposes of the Employee Retention Credit (ERC), a small business was defined as a business with 100 or fewer full-time employees. This means that small businesses meeting this employee threshold were eligible to claim the ERC for all wages paid to employees.

In 2021, the definition of a small business expanded, and it was defined as a business with 500 or fewer full-time employees. As a result, businesses meeting this employee limit were considered small businesses and could claim the ERC for all wages paid to employees.

However, it’s important to note that for large businesses, regardless of the year, the ERC eligibility is limited. Large businesses can only claim the credit for wages paid to employees who did not provide services during the eligible periods.

Is it possible to claim the ERC if I own multiple businesses?

If you own multiple businesses, it is indeed possible to claim the Employee Retention Credit (ERC). However, it’s important to note that when multiple businesses have a common owner, they are considered a single employer for ERC purposes. This entails aggregating gross receipts, the count of full-time employees, and the calculation of qualified wages across all of the owner’s businesses. By treating them as a single entity, it ensures that the eligibility criteria and credit calculations reflect the combined operations of the businesses under common ownership. Understanding and adhering to these aggregation rules is crucial to accurately determine the ERC eligibility and credit amount when you own multiple businesses.

If my business is already closed or I sold my business, am I still eligible for the ERC?

If your business operated during either Q3 or Q4 of 2020 or the first three quarters of 2021, you have the opportunity to claim the Employee Retention Credit (ERC) for any eligible period within those timeframes. However, if your business was closed and no qualified wages were paid, you are not eligible for the ERC.

If you were the owner of the business during any of the qualifying periods for claiming the ERC, you can still retroactively claim your refund if you meet all the IRS requirements. It’s important to note that you cannot claim the ERC for any period in which the business was under new ownership. As long as you fulfill the eligibility criteria and adhere to the ownership requirements, you can proceed with the process of claiming the ERC refund.

If my business’s revenue increased, can I still receive the ERC?

Even if your business experienced an increase in revenue in 2020 and/or 2021, there is a possibility that you may still qualify for the Employee Retention Credit (ERC). To be eligible with higher revenue, your business must have undergone a full or partial suspension of operations due to a government mandate. This means that even if your revenue increased, if your business faced restrictions or closures imposed by the government that affected your operations, you could still be eligible for the ERC.

Can self-employed individuals claim the ERC?

If you have other employees, yes, you may be able to claim the ERC if your business meets the guidelines set by the IRS. However, if you are the sole employee, then no. Read more here.

Can non-profit organizations avail themselves of the ERC?

Yes, non-profit organizations can avail themselves of the Employee Retention Credit (ERC) under certain conditions. Non-profit organizations that meet the eligibility criteria, such as experiencing a significant decline in gross receipts or a full or partial suspension of operations, can qualify for the ERC.

Is my business still eligible if it received a PPP loan?

Yes, your business can still be eligible for the Employee Retention Credit (ERC) even if it received a Paycheck Protection Program (PPP) loan. However, there are some limitations and restrictions to consider. As of the Consolidated Appropriations Act, 2021, and subsequent legislation, businesses that received a PPP loan are now eligible to claim the ERC, but they cannot use the same wages for both the ERC and PPP loan forgiveness. This means that wages used to qualify for PPP loan forgiveness cannot be used again for calculating the ERC. It’s important to consult with a tax professional or refer to official IRS guidance to understand the specific requirements and limitations based on your business’s situation.

What are the eligibility periods for the ERC?

The eligibility periods for the Employee Retention Credit (ERC) differ depending on the time frame. For 2020, the eligibility period starts on March 13, 2020, and ends on December 31, 2020. However, for 2021, the eligibility period extends from January 1, 2021, to December 31, 2021. This means that businesses can assess their eligibility for each quarter within these specified time frames to determine their eligibility for the ERC. It’s important to note that the rules and guidelines for eligibility may vary for each period, so it is advisable to refer to official IRS resources or consult with a tax professional for accurate and up-to-date information.

What qualifies as full or partial suspension of operations?

A full or partial suspension of operations, as defined for the purposes of the Employee Retention Credit (ERC), refers to government-imposed restrictions that limit or prohibit a business’s ability to operate as usual. This can include mandatory closures of physical locations, restrictions on capacity or operating hours, or other orders that significantly disrupt normal business operations. The specific criteria for what qualifies as a full or partial suspension of operations may vary based on the jurisdiction and the nature of the restrictions imposed. It is crucial to carefully review the government orders or regulations that directly affected your business and consult with official resources or a tax professional to determine if your business meets the criteria for a suspension of operations for the purpose of claiming the ERC.

Is there a deadline to claiming ERC?

The deadline for claiming the Employee Retention Credit (ERC) varies depending on the eligible quarters. For eligible quarters in 2020, the deadline is April 15, 2024. This means that employers must submit their claim for the ERC on or before this date. Similarly, for eligible quarters in 2021, the deadline is April 15, 2025. It’s important to note that these deadlines may be subject to change based on any future updates or extensions provided by the Internal Revenue Service (IRS). To ensure accurate and up-to-date information, it is recommended to consult official IRS resources or seek guidance from a tax professional.

How much decline in gross receipts qualifies my business for the ERC?

In order to qualify for the Employee Retention Credit (ERC), the definition of a significant decline in gross receipts varies depending on the year. For the year 2020, a significant decline is determined as a 50% decrease in gross receipts when compared to the same calendar quarter in 2019. However, for the year 2021, a significant decline is defined as a 20% decrease in gross receipts when compared to the same calendar quarter in 2019.

How are gross receipts calculated when determining the ERC?

When determining the Employee Retention Credit (ERC), gross receipts are calculated by considering all forms of revenue received by a business. This includes sales, services, interest, and any other income generated from the ordinary course of business. Gross receipts are generally calculated based on the accrual method of accounting, which means revenue is recognized when it is earned, regardless of when the payment is received.

How much can I receive from the ERC?

The maximum amount you can receive from the Employee Retention Credit (ERC) varies depending on the tax year. For tax year 2020, the credit allows you to receive up to 50% of qualified wages per employee, with a maximum of $5,000 per employee for the entire year.

In tax year 2021, the maximum credit amount has increased. You can receive up to 70% of qualified wages per employee per quarter, with a maximum of $21,000 per employee for the entire year. However, it’s important to note that for most businesses, eligibility is limited to qualified wages for the first three quarters (Q1 through Q3).

What records and documents do I need in order to calculate the ERC?

Payroll Records: This includes documentation of employee wages, hours worked, and any changes in employment status during the eligible periods.

Gross Receipts: Maintain records of your business’s gross receipts, such as sales records, financial statements, and other relevant documents that demonstrate revenue earned.

Eligibility Documentation: Keep documentation to support your business’s eligibility, such as government orders or notices that imposed restrictions on operations, closures, or capacity limitations.

PPP Loan Documentation: If your business received a Paycheck Protection Program (PPP) loan, maintain records related to the loan, including loan forgiveness applications and supporting documentation.

Supporting Financial Documents: Gather financial records, such as tax returns, financial statements, and accounting records, which can help in calculating the ERC accurately.

What constitutes qualified wages for the ERC?

Qualified wages for the Employee Retention Credit (ERC) include wages and certain healthcare expenses paid to eligible employees. The specific criteria for qualified wages may vary depending on the year and size of the business.

What does the term “FTE” mean in relation to the ERC?

In relation to the ERC, “FTE” stands for Full-Time Equivalent. FTE is a measure used to determine the number of full-time employees an employer has. It takes into account both full-time employees and the equivalent number of hours worked by part-time employees. FTE calculations help determine eligibility for certain provisions of the ERC, such as the size of the business and the maximum credit amount per employee.

Which employees can be considered for claiming the ERC?

For claiming the Employee Retention Credit (ERC), eligible employees include those who work for an eligible employer and meet specific criteria. Generally, any employee, including full-time and part-time, can be considered for the ERC. However, there are some exceptions. Business owners, their spouses, and certain relatives are excluded from being eligible employees. Additionally, for large businesses, the ERC can only be claimed for wages paid to employees who did not provide services during the eligible periods.

What does “not providing services” mean in relation to qualified wages?

In the context of qualified wages for the Employee Retention Credit (ERC), “not providing services” refers to employees who are not actively working or providing any services to the employer during the eligible periods. This typically applies to employees who are furloughed, laid off, or placed on temporary leave due to a full or partial suspension of operations or a significant decline in gross receipts. The wages paid to these employees during the period they are not providing services may be eligible for the ERC.

Are there any employees who are disqualified from ERC claims?

Self-employed individuals with no additional employees: If you are self-employed and have no additional employees, you cannot claim the ERC for your own self-employment income.

Relatives of majority owners: Wages paid to relatives of majority owners, such as parents, children, siblings, or grandchildren, are generally not eligible for the ERC.

Employees of government entities: Employees working for government entities, such as federal, state, or local governments, are not eligible for the ERC.

Employees of employers without significant decline in gross receipts or government shutdown: Employees of employers who did not experience a significant decline in gross receipts or were not subject to a full or partial government shutdown during the eligible periods are disqualified from the ERC.

Which forms should I use to apply for the ERC?

Use IRS Form 941-X when retroactively claiming the ERC.

Do I need to include documentation with Form 941-X?

No need to include documentations when sending Form 941-X.

Can I electronically file my amended tax return to claim the ERC?

You need to mail it.

Where should I send my amended tax return to receive my ERC refund?

It will depend on where you are located. The IRS website has a complete guide here.

What is the process for receiving an ERC refund?

You will receive a check in the mail from the IRS.

How long does it usually take to receive an ERC refund?

The timeframe for receiving an Employee Retention Credit (ERC) refund can vary. Generally, the IRS aims to process refund claims within a reasonable time, which is typically within a few weeks. However, factors such as the complexity of the claim, the volume of claims being processed, and any additional reviews or audits by the IRS can impact the processing time.

How can I check the status of my ERC refund?

To check the status of your refund, you can contact the IRS directly at (800) 829-4933. However, please note that wait times to speak with an IRS agent can be lengthy due to the limited availability of agents. Anticipate a wait time of 30-60 minutes or potentially longer, depending on the time of day. Keep in mind that the IRS will require you to provide verification of your identity and other essential information during the call.

Are there any limitations on how the ERC refund can be spent?

No, you can use the refund however you want.

Are third-party ERC companies reputable?

Third-party ERC companies can vary in terms of their reputation and reliability. While there are reputable companies that specialize in assisting businesses with claiming the Employee Retention Credit (ERC), it is crucial to exercise caution and research thoroughly before engaging any third-party service provider. We’ve provided a list of the best ERC companies here if you are considering getting help from one.

When should I consider hiring a professional to assist with my ERC claim?

Consider hiring a professional to assist with your Employee Retention Credit (ERC) claim under the following circumstances:

  1. Complexity: If your business’s situation is complex, such as having multiple locations, employees with different wages and hours, or various factors affecting eligibility, a professional can help navigate the complexities and ensure accurate calculations.
  2. Lack of Expertise: If you are unfamiliar with tax laws, calculations, and documentation requirements related to the ERC, hiring a professional can provide peace of mind and help you avoid errors or omissions that may affect your claim.
  3. Time Constraints: If you have limited time or resources to dedicate to understanding and claiming the ERC, a professional can handle the process on your behalf, saving you time and effort.
  4. Risk Mitigation: If you want to minimize the risk of errors or potential audits related to your ERC claim, a professional’s expertise can help ensure compliance and reduce the likelihood of issues.
  5. Maximizing Benefits: Professionals who specialize in ERC claims can identify all eligible opportunities, optimize your claim, and help you maximize the benefits you are entitled to.

Before hiring a professional, evaluate their qualifications, experience, and fees. Consult with them to determine if their services align with your needs and the complexity of your situation. Remember that you can also seek guidance from IRS resources, such as publications and helplines, to understand the requirements and process for claiming the ERC.

How can I avoid ERC scams?

To avoid Employee Retention Credit (ERC) scams, consider the following measures:

  1. Research and Verify: Thoroughly research and verify the legitimacy of any company, consultant, or service provider offering assistance with ERC claims. Check their credentials, reputation, and reviews from reliable sources.
  2. IRS Guidance: Rely on information and guidance provided directly by the IRS. Stay updated with official IRS publications, announcements, and resources related to the ERC. Be cautious of unsolicited emails, calls, or messages claiming to provide ERC assistance.
  3. Be Wary of Unrealistic Promises: Be skeptical of companies or individuals promising guaranteed results or unusually high refund amounts. ERC eligibility and calculations are based on specific criteria set by the IRS, and refunds vary based on individual circumstances.
  4. Protect Personal Information: Avoid sharing sensitive personal or financial information, such as Social Security numbers or bank account details, with unknown or unverified parties. Legitimate professionals typically have secure processes for handling client information.
  5. Upfront Fees: Exercise caution if asked to pay substantial upfront fees before any services are rendered. Reputable professionals usually charge reasonable fees upon successful completion of services.

What is the cost of hiring an ERC company to claim my refund?

ERC companies have different rates, so it’s important to look at different options and compare prices. Typically, they will charge between 10% – 15% of your claim.

Is the IRS conducting audits of ERC claims?

Yes, the IRS is conducting audits of Employee Retention Credit (ERC) claims to ensure compliance with the eligibility requirements and proper calculation of the credit. The purpose of these audits is to verify that businesses have met all the criteria for claiming the ERC and have maintained accurate records and supporting documentation.

It’s important to note that while the IRS aims to target noncompliance and fraudulent claims, not all ERC claims will be audited. However, businesses should be prepared to provide documentation and evidence to substantiate their eligibility and calculations if selected for an audit.

To minimize the risk of audits and ensure compliance, it is recommended to maintain thorough and accurate records, follow the IRS guidelines and regulations, and seek professional guidance when calculating and claiming the ERC.

What should I do if my ERC claim is audited?

If your Employee Retention Credit (ERC) claim is audited by the IRS, consider taking the following steps:

  1. Review the Audit Notice: Carefully review the audit notice received from the IRS. Understand the specific issues or concerns raised and the documentation requested.
  2. Gather Documentation: Collect and organize all relevant records, documentation, and supporting evidence related to your ERC claim. This may include payroll records, financial statements, tax forms, and any other documents that validate your eligibility and calculations.
  3. Seek Professional Assistance: Consider engaging a qualified tax professional, such as a certified public accountant (CPA) or tax attorney, experienced in dealing with IRS audits. They can guide you through the audit process, review your documentation, and represent you in communications with the IRS.
  4. Respond within the Timeline: Adhere to the timeline provided in the audit notice for submitting your response. Timely and comprehensive responses are important to demonstrate your cooperation and commitment to resolving any issues raised by the IRS.
  5. Provide Clear and Accurate Explanations: When responding to the audit, provide clear and detailed explanations that address the specific concerns raised by the IRS. Support your explanations with the relevant documentation and references to applicable tax laws or regulations.
  6. Maintain Communication: Maintain open communication with the IRS auditor assigned to your case. Respond promptly to any additional requests for information or clarification and keep a record of all interactions.
  7. Review the Audit Results: After the audit, carefully review the audit results and any proposed adjustments or changes. If you disagree with the findings, consult with your tax professional to determine the appropriate course of action, such as filing an appeal or providing additional supporting documentation.

Dealing with an audit can be complex and stressful, so it’s crucial to have professional assistance to navigate the process effectively.

What is the time limit for the IRS to audit ERC claims?

The time limit for the IRS to audit Employee Retention Credit (ERC) claims is generally within three years from the date the original tax return was filed or two years from the date the tax was paid, whichever is later.

What happens if an error was made when claiming the ERC?

If an error was made when claiming the Employee Retention Credit (ERC), it is important to take prompt action to correct the mistake. The specific steps to rectify the error may depend on the nature and extent of the error:

File an amended return: If you discover the error after filing your tax return, you may need to file an amended return using Form 941-X or other applicable forms. The amended return should correct the erroneous information and provide the accurate calculations for the ERC.

Pay any owed amounts: If the error resulted in an underpayment of taxes, it is essential to promptly pay any owed amounts, including any interest or penalties that may apply. Timely payment can help minimize further complications and potential liabilities.

Is the ERC refund considered taxable income?

No, the Employee Retention Credit (ERC) refund is not considered taxable income. The ERC is a tax credit designed to provide financial relief to eligible businesses. As a tax credit, it directly reduces the amount of taxes owed or results in a refund if the credit exceeds the tax liability.

Since the ERC refund is a tax credit and not income, it is not subject to federal income tax. However, it’s important to consult with a qualified tax professional to ensure compliance with any state or local tax regulations that may apply to the ERC refund in your specific jurisdiction.