Your Complete Guide to the Employee Retention Credit (ERC)
The COVID-19 pandemic brought unprecedented challenges to businesses of all sizes across the country. Companies in almost every industry were adversely affected by new government regulations like social distancing mandates, customer capacity limits, and work-from-home orders. As businesses were forced to modify their operations to comply with the new regulations, consumers were also ordered to stay home and go out for necessities only.
The economy began to suffer immediately. U.S. GDP fell by nearly 9% in the second quarter of 2020, and almost 10 million American jobs were lost by the end of the year. A recent survey reports that 83% of business people agree — the early 2020s have been the worst time for small businesses since the Great Depression.
To help limit the economic damage and support American families, workers, and small businesses, the U.S. Congress passed a $2.2 trillion stimulus bill called the Coronavirus Aid, Relief, and Economic Security Act (CARES). The CARES Act created a range of temporary pandemic relief funds to support American families, furloughed workers, unemployed individuals, small businesses, corporations, and healthcare providers. It still stands as the largest financial rescue package in our nation’s history. One important component of the CARES Act is a special government tax credit called the Employee Retention Credit (ERC).
Table of Contents
- What Is the Employee Retention Credit?
- How Much Money Can I Get From the ERC?
- How Is the ERC Credit Paid?
- When Is the ERC Deadline?
- Do I Need an ERC Specialist?
What Is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a refundable payroll tax credit created under the CARES Act that rewards businesses for keeping employees on their payroll throughout the pandemic by awarding up to $26,000 for each W-2 employee a company retained. The purpose of the ERC tax credit is to support employers with funds to keep their businesses running and keep staff working amid the economic fallout caused by the Coronavirus. This pandemic tax credit is a life-preserver for U.S. companies to stay afloat following the sea of shutdowns, capacity limits, and stay-at-home orders caused by COVID-19.
Today, there are millions of unclaimed dollars available, and nearly any company impacted by the pandemic may be eligible to claim their credit. A business doesn’t have to be struggling at this very moment to qualify.
How does the ERC work?
The Employee Retention Credit is a pandemic tax credit that has been updated multiple times in its 3-year existence. To apply for this payroll tax relief, companies file a payroll tax amendment by submitting IRS Form 941-X for every quarter they retained employees in 2020 and 2021. Many companies are eligible to receive up to $5000 for each employee in 2020 and up to $7000 per employee for the first three quarters of 2021 (up to $21,000). In total, your business may be able to receive up to $26,000 per employee on payroll throughout those two years.
However, the ERC tax credit gets more complicated, and certain IRS rules keep many companies from receiving the maximum amount. To ensure only the most deserving companies receive pandemic relief funds, the IRS placed strict regulations on who can qualify for the ERC.
The IRS examines your payroll on a quarterly basis, meaning that your company may qualify for the ERC for one quarter, but not the next. Only qualified wages are counted towards your ERC refund for the quarter in question. Wages are qualified by determining if they were subject to federal payroll taxes. Put more plainly, only wages paid to W-2 employees (or spent on employee healthcare) will qualify. If your company received loans from the Paycheck Protection Program (PPP), those wages will not count towards your ERC refund. Wages paid to the majority business owners and their family members will be removed from your ERC assessment as well.
Who Qualifies for the ERC Tax Credit?
Businesses across almost every industry may qualify for the Employee Retention Credit. Small businesses, startups, nonprofits, corporations, LLCs, and companies of less than 500 employees are eligible for the ERC tax credit.
There are only two qualifications for the ERC. To qualify, a business must first employ less than a certain threshold of full-time employees. Second, the business must have either faced a nominal disruption of its typical operations mandated by government order OR endured a considerable loss of income during the pandemic.
Another complexity of ERC qualification is that your business doesn’t have to retain an employee throughout the entire pandemic, or even a complete year, to qualify. The ERC, and payroll taxes in general, are submitted every quarter, meaning that any wages paid during that quarter, up to the wage cap, can be declared as “eligible wages.”
As you can see, ERC eligibility becomes quite complicated rather quickly, which is why we recommend seeking assistance from a reputable tax credit provider.
ERC 2020 vs ERC 2021 Qualifications
The rules regarding who qualifies for the ERC, and how much money a business can receive, are different for 2020 and 2021. The ERC qualifications for the 2021 tax year are more accessible than 2020, meaning that many businesses may qualify for sizable ERC refunds in 2021, but receive nothing for 2020.
Do startups qualify for the Employee Retention Credit (ERC)?
Startup businesses can qualify for the ERC through the Recovery Startup Credit and receive up to $50,000 per quarter for Q3 and Q4 of 2021, or up to $100,000 in total. To qualify for an ERC refund as a Recovery Startup Business, your company must have started on or after February 15, 2020, employ one or more W-2 employees, and may not exceed $1 million in annualized revenue.
The ERC is very friendly to businesses started during the pandemic. In fact, it’s much easier for startups to qualify for the ERC — they are not required to meet the declined income or government order impact qualifications.
How Much Money Can You Receive through the ERC Tax Refund?
In total, your business can potentially receive an ERC tax refund of up to $26,000 per W-2 employee from the IRS. A logistics company from Chicago, Illinois with 85 employees recently received a $1.6 million ERC refund. An electrical contractor from Bryan, Texas with 130 employees qualified for a $2.6 million ERC refund check.
Not all companies will qualify for the full amount, and the qualifications differ from 2020 to 2021.
- For 2020, the Employee Retention Credit (ERC) can refund your business up to 50% of the first $10,000 in qualified wages paid to each employee. This means your business can receive up to $5,000 back from the IRS per employee.
- For 2021, the ERC is even more generous. Your company can receive 70% of the first $10,000 in qualified wages paid to employees per quarter, meaning you can get up to $7,000 back per employee for each of the first three quarters of 2021.
For example, if your business had 65 employees in 2021, you could receive up to $455,000 back from the IRS.
How much money can I get from the ERC?
You can instantly view an estimate of your potential ERC refund amount using the Omega Employee Retention Credit Calculator. Using our ERC calculator is quick and easy, but it is not a definite quote. To receive a more accurate ERC calculation, sign up to be contacted by our team of tax credit professionals using the form in the upper right corner of the webpage.
How are payroll wages qualified for the Employee Retention Credit?
Payroll wages are qualified for the Employee Retention Credit simply by determining if the wages were subject to federal payroll taxes. In other words, only wages paid to W-2 employees will qualify. Wages paid to the majority business owners and their family members will not qualify, nor will wages paid using PPP funds. You can claim wages paid to full-time or part-time employees, and eligible wages are capped at $10,000 per individual for the year. You can recapture 50% of that for 2020, and 70% for 2021.
How Is the ERC Credit Paid?
The ERC credit is a tax refund paid to businesses through a paper check mailed from the IRS. It is not a future credit against the next quarter’s tax liabilities — it’s cash in your company’s pocket. Business owners are free to use their ERC refund check as they please.
Are there any restrictions on how you spend the ERC refund?
No, there are no legal requirements regarding how you spend your ERC refund check. The ERC is a tax refund — not a government loan or grant. This means that business owners are free to invest the ERC money to expand their company, pay business expenses and debts, or simply take the money home as profit. The IRS cannot penalize your business for spending its ERC money in a particular way — it’s your money to spend as you see fit.
Is the ERC a loan or grant?
No, the ERC is not a loan or grant. It’s a refundable tax credit — the IRS refunds you a percentage of the cash you have already paid in payroll taxes. The ERC differs from PPP because you do not have to pay back any amount of your ERC refund, nor apply to have it “forgiven.” Once you receive the refund check, you are free to spend it how you see fit.
Is the ERC refund taxable?
Your ERC refund does count as taxable income — it’s just like any other income for your business. You will have to pay business income taxes on your ERC refund check at the end of the quarter.
How long does it take to receive the ERC refund check?
Due to backlogging at the Internal Revenue Service (IRS), it typically takes about six to nine months to receive the ERC refund check. There are only three ERC processing centers that serve the entire nation, leading to long ERC wait times. That’s why it’s critical to have tax credit experts on your side who can quickly process your claim. The sooner your 941-X is submitted to the IRS, the sooner you can receive your refund check.
As your ERC provider, Omega Accounting Solutions can submit your amended payroll tax return to the IRS in as little as 30 days from onboarding. We can typically move as fast as you can provide the required documents and information.
Can I fast-track my ERC Refund Timeline?
The ERC backlog causes some companies to wait an entire year for their refund check. There is no magic method to speed up IRS processing times, but you can receive an ERC advance loan from a specialized tax credit provider. If your company cannot afford to wait through ERC refund delays, Omega Funding Solutions (OFS) can provide a quick business bridge loan against your ERC credit, up to 60% LTV of your expected refund amount. All you need to qualify for an OFS bridge loan is a valid ERC claim in process at the IRS.
Do employees benefit from ERC?
Because the ERC is a payroll tax credit, the tax refund is paid to the employer. Employees do not benefit directly from the ERC. However, they may benefit indirectly as the employer can use their refund money to continue paying employees or create new employment opportunities by expanding the business.
Is There a Deadline for ERC Submission?
There are two deadlines to submit your ERC claim, one for claims made on 2020 taxes, and one for 2021 taxes. For all quarters of 2020, the ERC deadline is April 15, 2024. For all quarters of 2021, the ERC deadline is April 15, 2025. The April 15 tax deadline applies to the previous year’s taxes (i.e. the deadline for tax year 2022 falls on April 15 of 2023), and businesses have three years to retroactively claim an ERC refund on taxes paid during the pandemic.
While the ERC filing window closes in 2024 and 2025, the U.S. Congress can also choose to end this pandemic tax credit at any time. That’s why it’s critical to file your amended payroll tax return claiming the ERC as soon as possible.
Can you still apply for the Employee Retention Credit in 2023?
Yes, you can still apply for the ERC in 2023 by submitting an amended payroll tax return claiming the Employee Retention Credit for the specific quarters in which your company qualifies. You must file form 941-X tax amendments within three years of the tax deadline for the quarter you wish to claim ERC.
How Do I Check My ERC Refund Status?
You can call the IRS and check on the status of your refund. They will provide a general update if they received the form. However, the IRS generally has long hold times due to a shortage of phone operators. We recommend checking the status of your ERC claim online. If your ERC provider has a CAF number, they can log into the IRS portal and check your ERC refund status.
What Is a CAF Number?
A CAF number is a unique nine-digit identification number that the IRS uses to keep track of authorized third-party tax service providers. It stands for Centralized Authorization File, and all legitimate tax servicers must have a CAF number in order to submit legal documents to the IRS on your company’s behalf. Before you choose an ERC provider, ask if they have an authentic CAF number. This ensures they are authorized by the IRS to provide tax services.
Do I Need an ERC Provider to Claim the Employee Retention Credit?
Some internal accountants have claimed the Employee Retention Credit without outside assistance, however, we recommend seeking guidance from a professional ERC provider. As you can see from the application process described above, amending your payroll tax return with IRS form 941-X can be quite complicated.
Claiming the ERC without expert help is a risky proposition for your business — even payroll tax professionals and CPAs find this special tax credit difficult to navigate. There is a likelihood that your company’s finance department will miscalculate your credit amount. If they overclaim your refund, your company will be subject to tax penalties and legal scrutiny. If they underclaim your refund, you leave money on the table that you were legally entitled to.
We recommend consulting an experienced tax incentives advisor to help determine if your company qualifies and guide you through the ERC claims process.
Contact an ERC Specialist
The tax credit professionals at Omega Accounting Solutions can handle the entire ERC application process for you. Omega’s ERC experts know precisely how to build ERC claims that will easily survive an audit. They’ve already secured tax incentives for clients in nearly every industry.
Omega Accounting is not just another ERC specialist. They perform due diligence on your company’s financial picture to ensure compliance with IRS rules. Should your company ever be audited, you can rest assured that your ERC claim is honest and accurate. Omega specializes in helping small-to-medium-sized businesses maximize their efficiency through Business Intelligence, fractional accounting, analytics, and tax credits. With Omega, all you have to do is provide the relevant documents, wait for the IRS to process your claim, and collect your ERC refund check.