The Employee Retention Credit (ERC) is a refundable tax credit. It was available to eligible employers who provided eligible compensation to employees between March 12, 2020, and January 1, 2022. The credit was aimed at helping businesses keep staff employed during the COVID-19 pandemic.
However, there is an important update: On December 27, 2022, they extended the deadline to claim the ERC to April 15, 2024. This gives businesses more time to file and receive a refund.
The ERC is a refundable tax credit. It is worth up to $7,000 per employee for 2020 and 2021. Businesses claim it by amending payroll tax returns or income tax returns. The credit amount depends on the wages paid to an employee in a quarter. If COVID-19 government orders impacted the company that quarter, the tax incentive enables employers to retain staff despite challenges from pandemic disruptions.
There are two main requirements to qualify:
A government COVID-19 order that fully or partially suspended operations or gross receipts declined by over 50% compared to the same quarter in 2019.
Employees received wages during the eligible quarter.
Companies must show how a government order affected them or that gross receipts dropped substantially. Government orders like quarantine orders, stay-at-home orders, and capacity limits qualify. A 50% or greater decline in gross receipts means lower sales.
The second requirement is paying wages to staff during the eligible quarter. Many types of compensation count, including health premiums, retirement contributions, and state taxes. Wages do not include paid time off, bonuses, stock options, or meals.
Furloughed employees who received wages qualify, too, unless wages were from a PPP (Paycheck Protection Program) loan, which cannot count for both programs. Independent contractors do not count as staff for the ERC. Owner wages to S corporations may qualify in some cases.
For eligible companies, the ERC equals 70% of qualified wages paid. In 2020, they capped it at $10,000 per employee for the entire year. In 2021, the cap rose to $7,000 per employee per quarter, up to $28,000 per employee for 2021.
Employers can claim credits on amended payroll tax returns. Company size and the extent of operations suspension determine the variation in qualified wages. But the 70% rate stays the same.
Eligible businesses claim the credit by amending Form 941 payroll returns. They can do this for qualifying quarters in 2020, 2021, or 2022. Amended returns obtain credits for those quarters as refunds.
Refunds will include the employer and employee share of Social Security taxes. They can request any excess credits on Form 8849. Most companies will need a tax professional's help. There are intricacies and documentation requirements, but the savings make it worthwhile.
Here are some frequently asked questions about qualifying:
What if no government orders applied to us? - You can still qualify if gross receipts dropped enough compared to 2019. Many firms have been eligible this way.
Can non-profits or companies with losses qualify? - Yes, orders or gross receipts, not profitability, determine eligibility.
Are self-employed individuals eligible? - Yes, they can claim the ERC on their 1040 return.
Are there special rules for controlled groups? - Yes, rules prevent double-dipping between related entities.
The extended deadline means substantial tax savings are still on the table. Consult a tax pro to ensure you get all the big refunds. You now have until April 15, 2024, to amend your returns. Take action now to secure cash back for your business.
For more on the employee retention credit, visit Coomber Consulting, LLC, at our office in Carlsbad, California. Call (760) 205-3810 to book an appointment today.