Employee Retention Credit, It’s not too late: learn how to claim ERC credits retroactively
By: Gene Fitz
As a result of the COVID-19 pandemic, the federal government implemented several relief programs for organizations to help them survive the pandemic. One of these programs is the Employee Retention Credit (ERC), originally via the CARES Act. ERC is of particular interest because, unlike other programs under the CARES Act, the ERC can be claimed for three years after the filing date of the original payroll returns. This means companies can retroactively claim these credits after the initial period has passed. This article provides an overview of:
- What is the ERC
- Who is eligible
- What information is needed to determine qualification
- How to submit a claim retroactively
1. WHAT IS THE ERC?
The Employee Retention Credit is a reimbursable payroll tax credit designed to assist organizations negatively impacted by the pandemic. This credit can be taken for 2020 as a whole and in the individual quarters of 2021. For eligible organizations, the maximum credit available in 2020 is $5,000 per employee for the year; for 2021, the maximum credit available is $21,000 per employee for the year ($7,000 for quarters 1, 2, and 3). Please note that the only businesses eligible for 2021 Q4 are Recovery Start-up businesses.
2. WHO IS ELIGIBLE?
Potential Eligibility in 2020 is for any employer with a trade or business (including tax-exempt organizations). However, government and related organizations are not eligible.
Potential Eligibility in 2021 was expanded to include government employers classified as 501(c)(1) and colleges and universities with significant focus on providing medical or hospital services. (For additional information visit https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart)
For 2020, the credit applied to employers of no more than 100 eligible employees. For 2021, this limitation was relaxed to include employers with 500 or fewer eligible employees.
In addition, to be eligible, organizations must have experienced a full or partial shut down due to government mandates or had a significant decline in gross receipts. For 2020, the gross receipts decline must be 50% or greater compared to the same calendar quarter in 2019. Employers will remain eligible for ERC until the quarter following the first quarter, where gross receipts become greater than 80% for the same quarter in 2019. For calendar quarters in 2021, the decline in revenue was reduced to a 20% decline compared to the same quarter in 2019. It is important to note that if the overall % is not achievable, the credit may still be available if there were lost sales for specific customers due to the pandemic.
Note: Employers who received a Paycheck Protection Program (PPP) loan are eligible to claim the ERC. However, there are restrictions — the employer cannot claim the same expenses for both programs. A review of the forgiveness documentation is needed to determine eligibility for those periods.
3. INFORMATION NEEDED TO DETERMINE QUALIFICATION
To help determine if you qualify for the ERC, the following pieces of information are needed:
- Quarterly payroll tax returns
- Revenue by quarter
- Wages by employee
- Wages used for the Paycheck Protection Program
4. HOW DO YOU SUBMIT A CLAIM?
Because the ERC is a payroll tax credit, the credit must be claimed on the employer’s quarterly 941 forms. Since the original forms for the applicable periods were already filed, a 941-X form is required for each period. In addition, the employer must amend its income tax return for that year to reflect the credit received.
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The ERC is real money that can still be claimed if the revised, more business-friendly criteria are met. As previously mentioned, the 2020 credit can be up to $5,000 per employee, and the 2021 credit can be up to $21,000 per employee; this can add up to a substantial amount. The clock is ticking, so the time to evaluate the pandemic’s financial impact on your organization is now!
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Gene Fitz is a Director of Warren Whitney and brings over 30 years of extensive experience in financial leadership and financial reporting in both the nonprofit and private sectors. Gene works with clients to maximize all aspects of their operational and financial performance. He works on an ongoing, part-time, fractional basis to provide a cost-effective way to supplement your finance function and build for the future. To learn more about financial management, contact Stephanie Ford at sford@warrenwhitney.com or 804.282.9566.
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