Businesses with serious adverse affects by the COVID-19 pandemic and the resulting restrictions. In response, the United States Congress introduced the Employee Retention Credit (ERC) to encourage businesses to keep their staff on the books during the pandemic season 2020.
If you are a business, you have likely already filed the original returns for the applicable periods (The first quarter of 2020 to the Third quarter of 2021). Still, you can file an amended return to claim the ERC within three years after the original date to file or two years after paying taxes due on the return, whichever is later.
Keep reading to learn about who qualifies for ERC and some ERC filing tips.
Who Qualifies for ERC?
The ERC is available to businesses or traders whose operations were subject to a partial or full suspension due to governmental orders or who experienced a significant reduction in revenue during the pandemic.
The key ERC eligibility and calculations vary for calendar years 2020 and 2021. Businesses of all sizes and across all industries, including both tax-exempt and for-profit organizations, generally qualify for ERC if they have experienced any of the following:
– Partial or total suspension of business operations due to the COVID-19 pandemic.
– Significant decline in gross revenue in comparison to the same quarter in the previous year.
Specific ERC Qualifications for 2020
Employers can capitalize and claim the ERC for 2020 if they operated a business or trade during the calendar year and experienced:
– Partial or full suspension of business or trade operations during any calendar quarter due to COVID-19-related government restrictions on travel, gatherings, or commerce. Essential businesses or those that managed to keep operations mostly intact remotely don’t meet this qualification.
– Significant decline in gross revenue means that the employer’s gross revenue for the first quarter of 2020 was less than 50% of the gross receipts for the same quarter in 2019.
The maximum qualified wages for each employee for all 2020 calendar quarters is $10,000. The maximum credit for an employee that qualifies for ERC is 50% of the first $10,000 in qualified wages, i.e., a maximum of $5,000 for each employee.
For employers with 100 full-time employees or more on average in 2019, the qualified wages are those paid to employees that didn’t provide services due to either partial or complete suspension of business or trade operations or the decline in gross revenues.
For employers with 100 full-time employees or fewer on average in 2019, the qualified wages are those that were paid to all employees during a period where business or trade operations were either partially or fully suspended or during the quarter with a decline in gross revenue, regardless of whether employees were providing services.
Specific ERC Qualifications for 2021
Effective January 1, 2021, employers are eligible to claim the ERC if they operated a business or trade during 2021 and experienced either:
– Partial or complete suspension of business or trade operations during any calendar quarter due to COVID-19-related government restrictions on travel, gatherings, or commerce.
– Significant decline in gross revenue for a single quarter in 2021 means that sales decreased by 20% from the same quarter in 2020. This is the measure for businesses to qualify for ERC in 2021.
For the 2021 calendar year, employers can claim a credit of 70% or less of qualified wages paid to employees after December 30, 2020, and before October 1, 2021. For 2021, the credit equals 70 percent of the first $10,000 in qualified wages for each quarter, i.e., up to $7,000 for each employee per quarter. As a result, employers that qualify for the ERC can get a maximum of $7,000 per quarter for each employee, which is a total of $21,000 for 2021.
Documentation Required to Prove ERC Eligibility
To support an ERC refund claim, employers must collect and maintain certain types of documentation as specified by the IRS. That documentation should include (among other things):
– Governmental orders that suspended trade or business operations.
– Any records used to calculate a “dramatic decline in gross revenue.”
– Records of the qualified wages and healthcare expenses of employees.
– Operational data linking the governmental order to business or trade impact.
– Records showing that a governmental order resulted in more than a negligible effect on trade or business operations.
ERC Filing Tips
To ensure that you file for the ERC correctly and reduce your chances of being audited by the IRS, consider the following tips:
– Organize Your Records: You must prove that the COVID-19 pandemic significantly impacted your business or trade and that you continued to pay your employees.
– Understand Your Return Before Filing: You must understand your business better. So, read the amended return for claiming the ERC, and don’t forget to ask questions before submitting the return to the IRS.
– Understand the filing dates and the ERC deadline for your tax year. You do not want to miss out on this opportunity because you didn’t know when the end dates were.
– Get Expert Advice: Seek professional help that you trust, such as your CPA, small business accountant, or another tax professional, to help you determine whether you are eligible. If they recommend that you don’t file, trust them.