The ERC: What It Is and How to Claim It in 2022

The CARES Act established the Employee Retention Credit (ERC) in 2020 as a fully refundable credit against payroll taxes to assist companies who continued to pay their employees during the Covid-19 pandemic during 2020 and 2021.
 
The tax credit is still available for eligible companies until the ERTC deadline of April 15, 2025. Both for-profit and nonprofit companies can qualify, regardless of whether they were profitable, stayed open during the pandemic, or received assistance from PPP funds.

How Does the ERC Tax Credit Work?

The Employee Retention Credit (ERC) is a refundable tax credit against money paid to the IRS for payroll taxes. Companies claim the credit by amending payroll tax returns filed for tax years 2020 and 2021. The ERC refund can equate to as much as $5,000 for each employee on the company payroll in 2020 and up to $21,000 per employee on the payroll for the tax year 2021.

Who Qualifies for the ERC?

Any company with employees on its payroll in 2020 or 2021 that experienced adverse financial effects from the pandemic, such as partial or complete shutdowns due to government orders.
 
The effects include revenue declines due to prohibitions on commerce, group meetings, or travel. Companies are included in the eligibility even if the only effect they experienced was a significant decline in revenues compared to 2019 gross receipts due to limitations brought on by the pandemic.

Can a Business Still Get the ERC After Receiving PPP Funds?

Originally the CARES Act had certain eligibility limits for the ERC if employers had taken a PPP loan. However, the provision was repealed by the Taxpayer Certainty and Disaster Relief Act of 2020. Consequently, a business that received PPP funds can also receive the ERC credit.

However, any wages paid with funds from a PPP loan do not count as wages that qualify for the tax credit.

How To Apply for Employee Retention Credit?

To apply for ERC refunds, companies must amend their payroll tax filings using IRS form 941-X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund). This form is used to make retroactive changes to quarterly payroll tax filings.
 
The IRS requires additional paperwork to calculate and complete the filing process. The amended form is completed for each quarter in which the company meets the eligibility requirements for the credit.

Is the ERC Only for Full-Time Employees?

Employers can include wages paid to both full-and part-time employees in their ERC calculation. The only limiting factor is that the credits consider only the first $10,000 paid to each employee and any health care costs paid to them during each period of credit calculation.

Does the ERC Have to be Paid Back?

The ERC stimulus money is not a loan; it's a refundable tax credit claimed against payroll taxes paid by eligible employers. It does not require any repayment. In many cases, the refund amount exceeds the payroll taxes paid in each credit-generating period.

How Does the IRS Determine If an Employer is a Large or Small Employer for the ERC?

For the tax credit in 2020, employers with 100 full-time employees or fewer, on average, meet the definition of a small employer. The measurement applies to the number of employees in 2019, and the IRS did not set any minimum number of required employees.
 
For the ERC in 2021, The number of employees for small employers was increased to 500, as measured by employees on the payroll in 2019. The IRS defines full-time employees as those who work an average of 30 hours or more per week or 130 hours per month.
 
A business determines its average number of employees in 2019 by adding the number of employees classified as full-time in each calendar month, then dividing by 12.

Ensure Your ERC Application Doesn’t Get Held Up

Navigating the guidelines to figure out your company’s qualifying gross receipts, wages, and other details can quickly become complex. Answering the question, “Do I qualify for the ERC?” isn’t always straightforward.
 
Make sure that your company receives the tax credit it deserves. Hire a team of experts with a depth of experience dealing with many complex situations and have stayed up to speed on IRS clarifications and guidance changes regarding the ERC.
 
To ensure that your ERC claim is completed correctly and filed promptly, don’t hesitate to call us for assistance. The IRS has become bogged down with ERC applications, and it could take up to 12 months for approval. Call us today, and we will get your claim filed as soon as possible.