Who Qualifies for the Employee Retention Credit

The Employee Retention Credit can be a big help for businesses that were trying to stay afloat during the height of the COVID-19 pandemic. But most people don’t know how it works, or who is eligible to claim the Employee Retention Credit.

This article will walk business owners through the steps and process to discover their eligibility and claim the payroll tax credit.

Business owners and employers suffered the brunt of the economic crisis when the pandemic hit. If you are one, then you know how difficult it was to keep employees in your workforce. The Employee Retention Credit was established to help small eligible employers around the United States with the cost of keeping staff employed. So, whether you are a small business owner you could be eligible to claim this tax credit.

What Is the Employee Retention Credit?

The Employee Retention Credit, or ERC for short, was created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. It is a fully refundable tax credit filed against employment taxes. The United States government established the ERC in 2020 to assist employers, business owners, and companies in keeping employees on the payroll despite the COVID-19 lockdowns.

Later, the Consolidated Appropriations Act was passed in December 2020 as well as the American Rescue Plan Act in March 2021. These two provisions impacted the Employee Retention Credit benefits and extended its deadline, making the credit more accessible to businesses.

Who Is Qualified for the Employee Retention Credit?

There are two main eligibility requirements that employers must meet to receive the tax credit. The first is a significant decline in gross receipts or total revenue without subtracting any costs or expenses. In most cases, the eligibility determination is based on the data from 2019 because it precedes the effects of the COVID-19 pandemic and lockdown, which officially began in March 2020.

Businesses that experienced the following may be eligible to receive the Employee Retention Credit:

  • Total revenues for quarters in 2020 must be at least 50% lower when compared to the same quarter in 2019
  • Total revenues for quarters in 2021 must be at least 20% lower when compared to the same quarter in 2019

Note: that they may be eligible for one calendar quarter but not the other calendar quarter, in the same calendar year.

Businesses that employ 500 or less full-time workers could be eligible for the ERC whether the company, business, or shop was forced to close under a government-mandated shutdown order or was able to stay open under a partial shutdown order.

Eligible companies can either be for-profit organizations or tax-exempt organizations such as a non-profit. Apart from this, they must meet one of the following conditions in 2020:

  • Operations are fully or partially suspended due to government restrictions on working, travel, commerce, and meetings
  • There is at least 50% less in the gross receipts of your business than in the same calendar quarter in 2019
  • “Recovery startup businesses” with yearly gross sales of $1 million or less that launched after February 15, 2020

Companies must meet one of the following conditions to be considered eligible in 2021:

  • Operations are totally or partially suspended due to government restrictions on working, travel, commerce, and meetings
  • There is at least 20% less in the gross receipts of your business than in the same calendar quarter in 2019
  • “Recovery startup businesses” with yearly gross sales of $1 million or less that launch after February 15, 2020

With that, companies that recovered from a significant decline in gross receipts and did not take the tax credit previously are still eligible to do this in 2023 even though the program has ended. Companies around the United States have three years after they filed their payroll taxes to review the wages paid and salaries earned after March 12, 2020.

Who Can Benefit from the Employee Retention Credit?

The Employee Retention Credit was intended for small businesses negatively impacted by the COVID-19 pandemic. The tax credit is available to employers who may have struggled to keep their employee workforce that either:

  • Experienced a significant decline in gross receipts calculated on a quarterly basis, with a 50% reduction in 2020 and/or a 20% decrease in 2021 compared to the gross receipts of the same quarter in 2019
  • Fully or partially suspended operations during an eligible quarter due to a governmental order that limited commerce, travel, or group meeting due to COVID-19

It is important to note that governmental employers are not eligible employers for the Employee Retention Credit. However, tribal governments and tribal entities may be eligible if they otherwise meet the requirements. Additionally, self-employed individuals are not eligible for their own earnings, but they may be able to claim the credit for wages paid to their employees.

What Are the Changes and Impacts of Government Orders?

Likely, your business operations were negatively affected by the COVID-19 pandemic. Your business may be eligible to file for the Employee Retention Credit if those impacts to your business operations can be directly tied to a government order and had more than a nominal effect. Below we will list some potential government orders that could make your business eligible for the employee retention credit:

  • reduced operation hours
  • temporary shutdown due to state or local orders
  • limiting staff in the office to a small number of workers only
  • curfew which prohibited staff from working on regular operation hours
  • shutdown of the office, warehouse, etc., for cleaning and disinfection from the COVID-19 virus
  • supply chain problems and reduced operations
  • limitations on physical space and social gatherings for business-related meetings and events

What Are the Steps to Claim the Employee Retention Credit?

Originally, qualified employers were supposed to record the Employee Retention Credit eligible salaries and receive the appropriate tax credits by filling and submitting Form 941 which is used to file the employer’s quarterly payroll tax return. However, the Employee Retention Credit is no longer applicable after the third quarter of 2021, or after October 1, 2021. Thankfully, there is still an opportunity for eligible employers to take advantage of the credit! Eligible employers can retroactively claim the Employee Retention Credit by filing and submitting Form 941-X, which is used to adjust an employer’s payroll tax return.

Note that the amended payroll tax returns can be submitted up to three years after the initial return filing deadline. So, qualified employers who wish to update their payroll tax returns still have time to finish their paperwork.

Can You Still Apply and Claim the Employee Retention Credit for 2021?

Looking at the legality of it all, the Employee Retention Credit was available until the fourth calendar quarter of the year 2021 for businesses that started after February 15, 2020. For other businesses, the Employee Retention Credit expired after September 31, 2021, but the employers who started their firm or business operations before February 15, 2020, may still be eligible to retroactively file for the payroll tax credit for 2020 and the first three calendar quarters of 2021. Employers who have any questions should reference IRS guidelines regarding when and how to claim the Employee Retention Credit based on your income tax return and if your business operations were partially suspended.

There are many benefits from the Employee Retention Credit. Reach out to one of our specialists today to learn about your business’s eligibility before the window to retroactively file comes to a close!