The Employee Retention Credit (ERC) And Your Business

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It is never too early for businesses and individuals to start thinking and planning for their taxes. With so many efforts around business pandemic-related resources and assistance programs through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) – many business owners can come out feeling confused and overwhelmed with deadlines and next steps.

One of those assistance programs that has reached its sunset is the Employee Retention Credit (ERC). The ERC is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees. The ERC was available only to eligible small business owners who met the following criteria:

Based by the number of Full Time Employees in 2019

  • 2020: Under 100 Full-Time Employees
  • 2021: Under 500 Full-Time Employees

While the qualifications were determined based off of two ways:

  • Business Operations were stopped/reduced due to a government mandate

OR

  • Gross sales were reduced:
  • In 2020 gross sales reduced by 50% vs 2019
  • In 2021 gross sales reduced by 20% vs 2019
  • The analysis is done on a quarterly basis

While businesses can no longer pay wages to claim the Employee Retention Tax Credit, you have until 2024 to do a look back on your payroll during the qualifying time frame and retroactively claim the credit by filing an amended tax return.

Here are a few things to take into consideration:

  • If you received the PPP loans you may be eligible to receive the ERC but you cannot double-dip. Any PPP funds towards payroll, will not qualify as eligible for Employee Retention Credit purposes.
  • If you received the EIDL Loan you may qualify for the ERC.
  • The difference between the PPP Loan, EIDL Loans and Employee Retention Credit is that the ERC does not have to be forgiven or paid back. There are no restrictions on how you spend your money.
  • Employees must be W2 – 1099 contractors do not qualify as employees.
  • If your business gets the credit, this is how it will impact your business and personal tax returns:
    • If you already filed your 2020 and 2021 tax returns – you WILL need to amend
    • If you have not filed your returns, you WON’T have to amend as long as you factor in the credit info
  • Below are the expiration dates for the credits:
    • For 2020: The credit does not close until 04/15/2024
    • For 2021: The credit does not close until 04/15/2025
  • A Full Time Employee is defined as someone who works 32 hrs a week or 130 hours per month.

If you have any questions on the ERC and if you qualify, reach out to Josue Castro – josue.castro@cplc.org, from our Prestamos team.

We would like to thank Aldo Aprile, CPA for his contributions to this article.