There are very few, if any, businesses that weren’t affected by the COVID-19 shutdown.
Whether your business was reduced, your doors were shuttered, or your traffic was lowered, there’s a high chance your business was negatively impacted by the pandemic.
However, many companies were still able to retain staff, despite the economic downturn. Keeping your employees not only helps them, but it also keeps your company strong and ready to rebuild.
For companies that were able to retain their employees, the government created a program to reward and help them: the Employee Retention Credit. This tax refund was available to many companies that retained staff during the shutdown of 2020 and 2021.
That still leaves plenty of questions unanswered: what exactly is the employee retention credit?
How does it work?
How do you redeem it?
To learn what the employee retention credit is and how to apply for it, read on!
What is the employee retention tax credit?
The employee retention tax credit is a tax credit offered by the IRS that was instituted by the CARES Act of March 2020.
The Employee Retention Tax Credit was then extended and expanded by the Relief Act of 2021 and the American Rescue Plan Act of 2021.
This is a tax refund that pays employers back a percentage of their employee’s wages during the months of the COVID-19 lockdown in the years 2020 and 2021. This is not a loan and does not need to be paid back, and was designed to provide economic relief to American business owners impacted by the pandemic.
Digging Deeper – What is the ERC?
Let’s dive into a few important aspects of the ERC that will help to determine if your business qualifies.
One thing to note is that the ERC is a tax credit, not a loan. That means it is applied during your tax filing to give you a refund.
This sets it apart from the Paycheck Protection Program (PPP), which was another government-run relief program for small and medium-sized businesses. The PPP was a loan, backed by the Small Business Association, to help businesses keep their workforce.
However, as long as a business complied with the PPP’s rules, the loan payment was likely forgiven in its entirety.
The first frequently asked question for qualifying for the ERC is if your business financially suffered during the COVID-19 shutdown. To qualify for the ERC, your company’s quarterly gross receipts in 2020 and 2021 must be at least 20% lower than the corresponding quarter in 2019. Companies that did not lose income (or grew) during 2020 and 2021 are not eligible.
Let’s break down some of the key terms that impact your business’s eligibility (and how much you’ll make from the tax credit).
Pro-Tip: Take this 60-second quiz to see if you prequalify for the ERTC!
➤ Qualified Wages
Only qualified wages are eligible for the Employee Retention Credit.
The thing is, there are two different definitions of qualified wages based on the size of your company, with different rules for companies with under 100 employees and companies with over 100 employees. That employee number is based on the number of employees in 2019, not 2020 or 2021.
The rule for companies with under 100 full-time employees, according to the IRS website, is:
“Those wages, including health care costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.”
Here’s the rule for companies with over 100 full-time employees, as explained on the IRS website:
“Wages, including certain health care costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.”
For 2020, businesses can claim 50% of a worker’s wages for the year, with a cap of $10,000. So, for 2020, employers could receive $5000 per employee. For 2021 wages, businesses could claim 70% of a worker’s wage, with a $10,000 cap per quarter. That means you can claim $7000 per quarter per employee.
The eligibility period for the ERC in 2021 ran from January 1st until October 1st 2021.
➤ Full-Time Employees
The next question is what constitutes a full-time employee.
Full-Time Employees are any worker who works more than 30 hours a week or 130 hours a month, as determined by section 4980H of the Internal Revenue Code. As before, the number of full-time employees you have is based on 2019.
That means companies that only use part-time employees (less than 30 hours a week) cannot benefit from the Employee Retention Credit.
➤ Businesses That Typically Qualify
Many industries can qualify for the employee retention credit. The main barrier is company size: your company needs to have 500 or fewer employees in 2019.
Let’s break it down industry-by-industry to give you some ERC examples and see who applies and why they might qualify.
1 Food & Beverage
COVID-19 led to an indoor dining ban in many states. Plus, with fear of the pandemic, dining and beverage consumption was way down for the years 2020 and 2021. Due to a lack of customers, the food and beverage industry suffered during the COVID-19 shutdown. Many restaurants were forced to shut down completely or sell their business, while others needed to change hours or reduce staff. Due to this economic hardship, food and beverage companies that maintained staff would qualify for the Employee Retention Credit.
Global construction output was down in 2020 due to the COVID-19 pandemic. Those who could work were forced to deal with new safety regulations and policies, which can add additional expenses and lengthen the time of construction projects. Considering these factors, construction business owners who were able to retain staff could be eligible for the Employee Retention Credit.
There was a significant downswing in the manufacturing industry due to the COVID-19 shutdown. In fact, there were an estimated 1.4 million manufacturing jobs lost in the U.S. in the early months of the pandemic. With the supply chain disrupted, there were delays, increased costs, and serious uncertainty in the manufacturing industry. While this industry has bounced back since the lockdown, those who kept employees on the payroll during 2020 and 2021 can receive the Employee Retention Credit.
The Coronavirus shutdown made retail stores suffer. Customers could not visit their stores and issues with the supply chain may have impacted their stock of goods. This never-before-seen disruption of commerce caused many retailers to struggle to maintain their workers and keep their doors open. Retail companies that maintained staff on the payroll will be eligible for the ERC.
The hospitality industry relies on people’s ability to travel. During the COVID-19 lockdown, with the majority of Americans indoors and the borders between countries closed, the hospitality industry was financially impacted. There were historically low occupancy rates in hotels and major revenue declines across the entire industry. Businesses in the hospitality sphere are eligible for the ERC.
How do I find out if I qualify for the employee retention credit?
To qualify for the Employee Retention Credit, your business must fall into one of the following categories:
- A disruption in business operations beginning after February 15, 2020 and continued due to the coronavirus pandemic. This includes companies that are fully or partially suspended by government orders or are unable to operate at their normal capacity due to the pandemic.
- A revenue decline. Your eligibility is largely based on your 2019 records. First, your organization must have 500 or fewer employees in 2019 to qualify. Also, your company’s quarterly gross receipts in 2020 and 2021 must be at least 20% lower than the corresponding quarter in 2019. This is to prove your business was financially impacted by the Coronavirus lockdown.
To find out if your business qualifies for the Employee Retention Credit, you’ll need to check your records from 2019, 2020, and 2021 to see if you meet the parameters set by the IRS. You’ll need to have less than 500 full-time employees in 2019 and your quarterly gross receipts must have dropped by 20% in comparison to the same quarter in 2019.
Note that self-employed individuals cannot qualify for the ERC. However, companies that used work from home to retain staff are eligible to qualify.
If you’re confused about whether or not you qualify, there’s help to be found: companies like ERC Assistant can let you know if you prequalify with a quick, simple online form.
How do I apply for the employee retention credit?
If you qualify for the ERC but still haven’t received any money, you need to apply for the Employee Retention Credit.
Since the eligibility period for the ERC ended in October of 2021 and the 2021 tax deadline has come and gone, you can now only receive the tax credit retroactively. To do this, you’ll need to fill out and submit Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, available on the IRS website.
Form 941-X will walk you through the various information you need to provide, most of which is a detailed listing of relevant wages and income tax. The form is long and complicated, so put aside an hour or more to make your way through Form 941-X.
You should start the application process as soon as possible—once your forms are submitted, there is still a long wait before you’ll have your money in hand. While the IRS claims a wait time of six to ten months after Form 941-X is filed, many business owners have claimed 16 months or longer wait times!
Pro-Tip: Take this 60-second quiz to see if you prequalify for the ERTC!
Each company’s journey through COVID was unique. We recommend working with a company that has experience with filing ERC to maximize the eligibility return of ERC. See if ERC Assistant can help you get your ERC money faster and with less hassle.
ERC Assistant is an employee retention credit service that offers a streamlined process for onboarding clients and filing claims in as little as 1-2 weeks. ERC Assistant also has a secure Client Portal protecting sensitive information. You can get an initial ERC estimate at no cost, with minimal time invested on the front end. This service can also protect you from ERC-related scams or attempts at fraud that may be out there.
Lastly, the ERC Assistant team can deliver ready-to-file documents for the IRS without involving your payroll company.
ERC Assistant makes it easy to apply for the ERC by analyzing whether or not your business qualifies for the ERC Program, what amount you should receive and any additional technical details that might arise in this otherwise complex process. With the experts at ERC Assistant by your side, you don’t have to worry about navigating it yourself. They will guide you and outline the steps it will take for you to maximize the claim for your business.
Learn more: ERC Assistant
If you managed to retain staff while your business was financially hurt during the COVID-19 shutdown, you need to find out if you qualify for the Employee Retention Credit. You could receive tens of thousands of non-taxable dollars directly from the IRS. Take the time to learn about the Employee Retention Credit and receive the financial relief you deserve after the difficulties of the last few years.