ERC Qualifications: How To Determine Your Employee Retention Tax Credit Eligibility?

The Employee Retention Credit (ERC) is a refundable tax credit intended to motivate businesses to keep employees on their payroll amid significant disruptions like the COVID-19 pandemic. The key ERC qualifications are based on business operations and wage requirements. In terms of operations, the company should have either been totally or partially suspended due to governmental orders connected to COVID-19 or experienced a significant drop in gross receipts within a specific calendar quarter.

Diving more resounding, regarding wage requirements, the amount of qualified wages for which an eligible employer may claim the ERC depends on the average number of its full-time employees. For example, suppose the company had more than 100 full-time employees on average in 2019. In that case, eligible wages are those given to employees when they cannot provide services due to a business stoppage or a drop in gross receipts.

However, in 2019, for businesses with 100 or fewer full-time employees, all employee wages are eligible for the credit, whether the employer is open for business or subject to a shutdown order. Understanding these nuances is vital to successfully navigating ERC qualifications.

Who Meets The Employee Retention Credit (ERC) Eligibility?

The Employee Retention Credit (ERC) eligibility is not limited to a specific industry or company size, making it widely accessible to various businesses. It is mainly designed for those entities that retained their employees despite economic hardships during the COVID-19 pandemic.

Employers with Operations Fully or Partially Suspended Due to Governmental Orders

One group of businesses meeting the ERC qualifications is those whose operations were fully or partially suspended due to a COVID-19-related shutdown order. The partial or complete suspension of operations can occur anytime during a calendar quarter.

Employers Who Undergo a Significant Decline in Gross Receipts

Businesses that experienced a significant drop in gross receipts are also eligible for the ERC. Specifically, gross receipts for a given quarter must be lower than 50% of gross receipts for the corresponding calendar quarter in 2019.

Small Businesses with 100 or Fewer Employees

Another group eligible to claim the Employee Retention Cred is small businesses that have 100 or lesser full-time employees in 2019. All employee wages may qualify for the credit for these entities, regardless of whether the company was open or shut down.

Large Businesses with More Than 100 Full-Time Employees

Large businesses with over 100 full-time employees in 2019 can also qualify for the ERC. However, for these companies, only the wages paid to employees not giving services due to the suspension of the business or the decline in gross receipts can be counted for the credit.

Who Doesn't Meet The Employee Retention Credit Eligibility?

Interestingly, not all entities are eligible for the Employee Retention Tax Credit. Due to their specific circumstances or classification, certain businesses and organizations fall outside the scope of ERC eligibility. Here are they:

Government Entities

Federal, state, and local government entities do not meet the ERC tax credit eligibility criteria. This restriction extends to any agencies or instrumentalities of these governmental bodies.

Businesses Not Subjected to Government Restrictions

Businesses that were not subjected to any government-imposed restrictions related to COVID-19 and that didn't experience a significant decline in gross receipts fail to meet the ERC qualifications. If a business could operate as usual throughout the pandemic, it's not eligible for the credit.

Companies Without Full-Time Employees

Companies with full-time employees, such as freelance or contract-based businesses, must meet the ERC qualifications. The credit is intended to help businesses retain their full-time workforce during financial hardships.

Self-Employed Individuals

Lastly, self-employed individuals do not qualify for ERC credit, as the criteria focus predominantly on businesses retaining their employees, which only applies in this context.

Understanding Qualified Wages

Concerning the ERC refund, the term 'qualified wages' has a specific definition that businesses should comprehend to ensure the correct application for the tax credit. Generally, qualified wages encompass the compensations paid by an eligible employer to employees during business disruption due to COVID-19-related restrictions or a significant drop in gross receipts.

Notably, 'qualified wages' also include certain health plan expenses. Specifically, an employer's share of health plan expenses for maintaining a group health plan, which is excludable from an employee's income, are also considered as part of 'qualified wages.' This includes plans where employers and employees share the cost and those where the employer is the sole contributor.

A key point to remember is that the calculation of 'qualified wages' differs based on the business size. 'Qualified wages' are the pay provided to employees when they do not perform services owing to the cessation of business operations or a considerable decrease in gross receipts in firms with more than 100 full-time employees. On the other hand, for businesses with 100 or fewer full-time employees, 'qualified wages' encompass all salaries paid to employees, irrespective of the business's operational status.

Another essential aspect to consider is the time frame for which wages qualify. Wages paid after March 12, 2020, but before January 1, 2021, are usually considered qualified wages. Nonetheless, as part of the Taxpayer Certainty and Disaster Tax Relief Act 2020, this term was extended until June 30, 2021.

Remember, accurate calculation and understanding of 'qualified wages' is vital as it directly impacts the amount of credit a business can claim under the Employee Retention Credit. Misinterpretations or errors can lead to decreased benefits or potential issues with the Internal Revenue Service (IRS). Therefore, consulting a tax professional or a seasoned accountant for personalized guidance is often a good idea.

ERC Credit Qualifications For 2020

Businesses wishing to claim the Employee Retention Credit in 2020 needed to meet specific eligibility criteria:

1. Operational Suspension: Businesses must have undergone a total or partial suspension of operations owing to COVID-19-related government orders during any calendar quarter.
2. The decline in Gross Receipts: Alternatively, businesses had to undergo a significant decline in gross receipts. For 2020, this meant a drop to below 50% of their gross receipts for the same calendar quarter in 2019.
3. Number of Employees: A business's number of full-time employees in 2019 determined how they could claim the Employee Retention Credit. For companies having 100 or fewer employees, all wages could be claimed. For those with over 100 employees, only paying for employees not providing services could be claimed.
4. Exclusions: Certain entities were excluded from claiming the ERC refund, including governmental entities, businesses not subjected to COVID-19-related governmental orders, companies without full-time employees, and self-employed individuals.
5. Qualified Wages: The definition of 'qualified wages' depended on the size of the business. For businesses with more than 100 employees, it covered wages for a time when employees were not providing services. For those with 100 or fewer employees, it included all wages. Qualified wages also had certain health plan expenses.
6. Time Frame: The wages eligible for the ERC refund had to be paid after March 12, 2020, and before January 1, 2021. However, an extension was later granted through June 30, 2021, due to the Taxpayer Certainty and Disaster Tax Relief Act.

ERC Credit Qualifications For 2021

For the year 2021, the eligibility criteria for the ERC refund underwent some modifications:

1. The decline in Gross Receipts: The threshold for the decline in gross receipts was relaxed. Companies demonstrating a drop in gross receipts to less than 80% of the same quarter in 2019 are now eligible.
2. Number of Employees: The determining number of employees was increased. The division is now set at 500 employees from 100. Businesses with 500 or lesser employees can claim all wages, while those with more than 500 can only claim wages for employees not providing services.
3. Maximized Credit: The credit rate was raised from 50% to 70% of qualified wages. Moreover, the limit on per-employee creditable wages was increased to $10,000 for each quarter instead of all quarters.
4. Advance Payment: Businesses with less than 500 employees can appeal for an advance payment of the credit.
5. New Businesses: Businesses that started operations after February 15, 2020, and meet certain conditions are eligible for the ERC, with a capped maximum credit of $50,000 per quarter.
6. Severance Pay: Severance pay can now be considered as qualified wages.
7. Time Frame: The eligible period for the ERC was further extended through December 31, 2021, as part of the American Rescue Plan Act.

Employee Retention Credit Eligibility for Recovery Startup Businesses

In 2021, the Employee Retention Credit (ERC) was expanded to include a new category of businesses referred to as recovery startup businesses. These businesses started operations in a designated recovery zone after February 15, 2020.

A recovery startup business begins conveying on any trade or business after February 15, 2020, and has average yearly gross receipts of less than $1 million. These businesses may not have experienced a decline in gross receipts or a total or partial shutdown due to a governmental order but still suffered significant economic fallout from the pandemic.

Recovery startup businesses are eligible to claim the ERC even if they do not meet the other criteria necessary for eligibility. For these businesses, the maximum ERC they can claim is limited to $50,000 per quarter, irrespective of the number of employees they have. This measure was introduced to relieve newly established businesses struck by the pandemic financially.

While claiming the ERC, recovery startup businesses must follow the correct procedures and guidelines. The credit should be reported on the employer's employment tax return, typically Form 941, Employer's Quarterly Federal Tax Return. Suppose a business qualifies and anticipates that the ERC for any calendar quarter will be more than the employer portion of the social security tax. In that case, they can request an advance payment from the Internal Revenue Service (IRS) by submitting Form 7200, which is for Advance Payment of Employer Credits Due to COVID-19).

As always, they are keeping detailed records when claiming tax credits is critical. This includes documentation showing how the business meets the definition of a recovery startup business, how you determined the qualified wages, and how you calculated the credit. A tax professional can provide invaluable assistance in ensuring these requirements are met, helping businesses maximize their ERC while adhering to IRS rules and regulations.

When Is The ERC Tax Credit Application Deadline?

The application deadline for the Employee Retention Credit (ERC) is tied to the statute of limitations for your business's tax return. This means firms typically have three years from the original tax return filing or two years from when the tax was paid - whichever is later - to amend the return and claim the credit.

If a business wants to apply for the ERC for 2020, the deadline to amend payroll tax returns and claim the credit is typically April 15, 2024. If you extended your 2020 return and filed later, you have three years from the actual filing date to claim the ERC for 2020.

The claim period for the ERC for 2021 will depend on when you file your 2021 tax return. If you file by the regular deadline of April 15, 2022, you will have until April 15, 2025, to amend your return and claim the credit.

Remember, it's essential to consult with a tax professional to understand your specific circumstances. Businesses unable to meet the standard deadline due to reasonable cause may request an extension, but the IRS evaluates such cases individually.

To claim the ERC in future quarters, eligible employers must submit their total qualified salaries and related health insurance expenditures on their employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return.

In conclusion, the ERC offers a valuable lifeline to businesses affected by COVID-19. Ensure you know the application deadlines and procedures to maximize your potential credit.

How To Avoid Employee Retention Credit Scams

While the Employee Retention Tax Credit provides much-needed business assistance, it has unfortunately become a scam target. Here are some measures you can take to protect your business:

1. Verify Communication: Be careful with unexpected communications purportedly from the IRS. The IRS usually communicates via mail rather than email, phone calls, or social media channels.
2. Guard Personal Information: Only disclose personal, financial, or business information if you've confirmed the authenticity of the request. Scammers might pose as IRS officials to extract such information.
3. Consult a Professional: If you need clarification on a particular communication or procedure, consult a certified tax professional. They can provide clarity and help you avoid falling victim to scams.
4. Be Aware of Threatening Language: The IRS will never threaten to immediately bring in law enforcement to have you arrested for not paying a tax bill.
5. Use Authorized IRS Channels: Always use authorized IRS channels for claim submission or communication.
6. Report Suspected Scams: If you suspect a scam, report it to the IRS. This can help protect your business and others who might be targeted.

Why Should Eligible Businesses As Ask Help From ERC Specialists Like ERTC Express?

Engaging ERC specialists such as ERTC Express presents several advantages for eligible businesses:

1. Expert Guidance: Specialists are well-versed in the intricate details of the ERC legislation, ensuring businesses make accurate claims that maximize their benefit.
2. Time-Saving: Navigating through the complexities of ERC can be time-consuming. Specialists expedite the process, thus allowing businesses to focus on their core operations.
3. Risk Mitigation: ERTC Express specialists can help mitigate risks associated with incorrect filings, which could lead to penalties.
4. Continuous Support: Specialists provide ongoing support, staying updated with changes in legislation and communicating these changes effectively to businesses.
5. Personalized Service: ERC specialists provide customized services tailored to each business's unique circumstances and needs, ensuring optimal benefits.
6. Audit Support: In the case of audits by the IRS, having a professional who understands the intricacies of ERC can be invaluable. ERTC Express provides such support, assisting businesses in navigating through potential audits.