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Employee Retention Credit: What You Should Know About the ERC

Due to a surge in fraud and questionable claims, the IRS has placed a moratorium on processing new Employee Retention Credit applications until at least Dec. 31, 2023. Payout for claims that were already accepted will move forward, but stricter compliance reviews have extended the standard processing goal for claims from 90 days to 180. Read the IRS’s official announcement for more details.

High employee retention doesn’t just help businesses — it helps communities, too.

Through the Employee Retention Credit (ERC), certain employers can receive a tax refund for keeping people during the COVID-19 pandemic. Knowing how you qualify for the ERC isn’t always straightforward. In fact, some organizations could be missing out on savings they technically earned.

Certain employers may not believe they qualify for the ERC because they:

  • have received a Paycheck Protection Program (PPP) loan
  • were never closed due to a government order
  • didn’t lose revenue in 2020-21

These assumptions aren’t necessarily true; no single condition listed above disqualifies a company for the ERC. Eligibility is a little more complex.

If you’re intimidated by the ERC, consider this blog post the ABCs for a crucial tax credit. Let’s get started.

What is the ERC?

Authorized under the CARES Act of March 2020, the ERC is a payroll tax credit of up to $26,000 per employee for eligible businesses. To qualify, organizations must have retained W-2 employees from March 13, 2020, to Sept. 30, 2021.

In 2021, the Consolidated Appropriations Act and the American Rescue Plan Act expanded the ERC. These laws greatly increased the size of the credit and the date range of eligible wages. The Infrastructure Investment and Jobs Act (IIJA), however, modified the ERC to retroactively exclude wages that would have been eligible in the fourth quarter of 2021, with the exception of recovery startup businesses.

Who is eligible for the ERC?

With the exception of federal, state and local government entities, most employers have at least the potential to qualify.

The ERC requires organizations to prove mandated COVID-19 restrictions negatively impacted them. According to the IRS, qualifying events include:

  • an order from a mayor closing nonessential businesses
  • an emergency proclamation to shelter in place for a specified period
  • an imposed curfew that cut off operating hours
  • a notice from a local health department to close for cleaning and disinfecting directly related to COVID-19

These restrictions vary between states, so companies can also qualify if they prove a sharp decrease in receipts between March 13, 2020, and Sept. 30, 2021.

But what’s the difference between an inconvenience and an ERC-eligible impact? Qualifying scenarios include:

  • reduction in travel or group meetings
  • temporary office or facility closures
  • occupational capacity restrictions
  • reduced operating hours

Since filing an inaccurate tax return has legal consequences, consult a CPA or licensed attorney about whether specific situations qualify for ERC.

Is the ERC still available?

Though the IIJA retroactively shortened the ERC’s eligibility period, employers can still file an amended payroll tax return for each quarter in which they qualified.

How do companies claim the ERC?

Employers must file a Form 941-X by:

  • April 15, 2024, for all qualifying quarters in 2020
  • April 15, 2025, for all qualifying quarters of 2021

How much money could a company get from the ERC?

While the maximum of $26,000 per employee is possible, it’s not guaranteed. Businesses can receive up to a $5,000 credit per employee in 2020 and up to $21,000 per employee for 2021. Visit the IRS website for a comprehensive list of eligibility requirements.

Is the ERC taxable?

A tax credit doesn’t mean tax free.

When employers file an amended return with a 941-X, they must reduce their wage deductions by the amount of the tax credit. Certain individuals or businesses may also need to amend their income tax returns to reflect the reduction. Examples of income tax returns that could be amended are:

What is the difference between the ERC and the PPP?

Like the ERC, the PPP helped businesses keep employees during parts of the COVID-19 pandemic. While the ERC is a tax credit, the PPP was a loan program backed by the U.S. Small Business Administration. The program began on April 3, 2020, and ended on May 31, 2021.

Though the PPP was designed to help organizations keep paying their employees, it covered more than just payroll. The loan helped companies cover:

  • benefits
  • rent, mortgage and utilities
  • specific supplier costs and expenses
  • worker protection costs related to COVID-19
  • uninsured property damage costs caused by looting or vandalism

Unlike PPP funds, the ERC isn’t a forgivable loan. Because it’s a tax credit, businesses don’t have to use the ERC for any specific purpose. The PPP and ERC also have different:

  • qualification criteria
  • deadlines to apply
  • payment types and calculations
  • tax filing implications

Can businesses that received a PPP loan apply for the ERC?

Under the CARES Act, employers could only take a PPP loan or the ERC. But the Consolidated Appropriations Act allowed them to apply for both. As a result, ERC tax refunds from 2020 and 2021 are completely distinct from PPP loans.

This doesn’t mean businesses can claim the ERC for wages funded by a PPP loan. However, it does mean wages outside PPP-covered periods may qualify. This also means an employer can qualify for the ERC and not the PPP under certain circumstances.

How do businesses avoid ERC scams?

The IRS is currently investigating entities that have charged unqualified businesses for filing amended returns to falsely claim ERC tax refunds. These scammers prey upon small– to mid-sized businesses, costing them thousands in fees.

Unfortunately, the investigation won’t deter scammers in the meantime. Protect your business and do your due diligence. Before signing an engagement letter for ERC services, research the credentials of the provider to ensure they are legitimate.

Similarly, avoid companies that claim they can “qualify you online in just 5 minutes.” You should also dodge any organization that guarantees a refund before reviewing information on your 2019-21:

  • gross receipts
  • payroll data
  • operational disruptions

How does the right HR tech help businesses with the ERC?

Software and payroll services are extremely useful for compliance, but they do not replace certified professionals. Be sure to contact a licensed attorney for any legal or tax advice.

That being said, HR tech that creates insightful reports with your payroll data can give you an early idea about your ERC eligibility. A tool to simplify ACA compliance, for example, can provide a report reflecting the same full-time criteria (130 hours per month per employee) as the ERC.

When you’re preparing to amend your 2020 or 2021 tax returns, comprehensive reporting software lets you quickly reference gross wage and employer-paid health reports. If you used the right HR tech to file in both of those years, you’ll even have instant access to your previous Form 941s. While the software can’t file for the ERC for you, it can give you a clearer idea about your qualifications.

Explore Paycom’s HR management tools to learn how they help businesses ace compliance.


DISCLAIMER: The information provided herein does not constitute the provision of legal advice, tax advice, accounting services or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional legal, tax, accounting or other professional advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation and for your particular state(s) of operation.