The Employee Retention Credit (ERC), originally passed in March of 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, was designed to help businesses keep their workers employed throughout the pandemic. The credit has undergone several modifications since 2020, with the most recent change passing on Nov. 15, 2021, and many businesses have declined to claim the credit due to misconceptions about their eligibility.
If you have lingering questions about how to claim the Employee Retention Credit, or if confusion has held you back from claiming it at all, it’s not too late. Our national tax experts have compiled a list of common misconceptions about claiming the Employee Retention Credit, who can benefit from it, and how it works. Read on to learn how you can earn your missed savings.
Revenue Must Have Declined in 2020 and 2021 to Claim the ERC
Since the ERC was intended to help businesses affected by the pandemic, many business owners are hesitant to claim it if they don’t believe they were affected enough. However, the wording of the CARES Act states that businesses must either experience either a significant decline in gross receipts or a full or partial suspension of business operations due to government orders.
Even if your business handled the financial challenges of the pandemic reasonably well, you can still claim the credit for the operational challenges caused by the government shutdown. This aspect of the ERC has remained steady since the beginning of the ERC, but it is often overlooked by employers.
A Complete Shutdown of Operations is Required
Business owners also frequently, and mistakenly, believe that their business had to experience a complete shutdown of operations to qualify for the ERC. However, if you experienced a significant decline in gross receipts, you are still eligible for the credit. Like the previous point, this misconception stems from the belief that both eligibility requirements listed in the CARES Act must be fulfilled; but this belief leads many business owners to miss out on crucial savings.
Additionally, business operations that were only partially suspended also qualify for the ERC. This includes situations like restaurants that transitioned into takeout-only services or hospitals that remained open but halted elective procedures.
Essential business owners often assume that they can’t claim the credit because their business, by nature, had to remain operational during the shutdown. But the IRS Notice 2021-20 offers some clarification on this point, reading “an employer that operates an essential business may be considered to have a partial suspension of operations if, under the facts and circumstances, more than a nominal portion of its business operations are suspended by a governmental order.” Essential businesses that remained open but limited their operations due to government orders do qualify for the ERC under this clarification.
PPP Loan Recipients are Not Eligible
The Paycheck Protection Program (PPP) was introduced alongside the ERC in the CARES Act, providing financial relief for payroll costs, rent, interest, and utilities. Employers who maintained wages and employee counts could apply for PPP loan forgiveness, eliminating their debt.
Initially, the wording of the CARES Act did not allow PPP loan recipients to claim the ERC. The credit was modified under the Consolidated Appropriations Act (CAA) in Dec. 2020, stating that “an employer that is eligible for the employee retention credit (ERC) can claim the ERC even if the employer has received a Small Business Interruption Loan under the Paycheck Protection Program (PPP).”
Employers cannot claim the ERC using any wages that count towards payroll costs for PPP loan forgiveness, but PPP loan recipients are not prohibited from claiming the Employee Retention Credit.
Business Size Affects Employer Eligibility
The number of employees working for a business classifies them as a small employer or a large employer, and this classification determines the type of wages they can use to claim the ERC. Small employers can apply the ERC towards all employee wages during the eligible time frame, while large employers can only claim the credit for wages paid to employees who did not provide services during the pandemic. The Consolidated Appropriations Act (CAA) raised the threshold of the “large employer” classification from 100 employees to 500 employees.
While the business size does play a role in the ERC calculations, it has no impact on general eligibility. Small and large businesses alike can claim the credit; the distinction only determines the value of the eventual savings.
It’s Too Late to Claim the ERC
The Infrastructure Investment and Jobs Act (IIJA), signed by President Biden on Nov. 15, 2021, ended the ERC for wages paid after Sept. 30, 2021. However, employers can retroactively claim the credit towards wages paid from March 13, 2020, through Sept. 30, 2021. If you haven’t claimed the credit and you realize now that you could qualify, or if you didn’t know how to claim the Employee Retention Credit in the past, it is not too late to earn your savings.
Additionally, if misunderstandings kept you from claiming too little of your qualified wages, you still have time to file for the remainder. File an amended quarterly employment tax return (Form 941-X) for the appropriate quarter(s) to update your return with the appropriately qualified wages.
Businesses have up to three years to retroactively claim the ERC.
Connect with a Tax Specialist
The complexities and frequent changes in regards to claiming the Employee Retention Credit make it tricky to understand. If you are looking for guidance on how to claim the Employee Retention Credit, how to earn the most savings on your tax return, or how to navigate the intricacies of the tax code, reach out to the national tax experts at National Tax Group. We specialize in unlocking complex and underutilized tax benefits and finding our clients their most lucrative savings. Contact us for a free assessment of your benefits.