Employee Retention Tax Credit Guide

The Employee Retention Tax Credit (ERC) was a vital provision designed to support businesses that kept employees on their payroll during the COVID-19 pandemic. Understanding this complex credit is essential for employers who either claimed it previously or are still exploring their eligibility for this significant financial benefit. This guide aims to demystify the ERC, providing clarity on its purpose, requirements, and how to navigate the claiming process effectively.

What is the Employee Retention Tax Credit (ERC)?

The Employee Retention Tax Credit is a refundable tax credit against certain employment taxes. It was established under the CARES Act to encourage businesses to retain employees during the economic disruption caused by the COVID-19 pandemic. The ERC provided a substantial incentive for employers to keep staff employed, even when facing significant revenue losses or government-mandated shutdowns.

Originally, the ERC was available for wages paid between March 13, 2020, and December 31, 2020. Subsequent legislation, primarily the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021, extended and expanded the credit. These expansions made the ERC available for wages paid through September 30, 2021, for most employers, and through December 31, 2021, for recovery startup businesses.

Who is Eligible for the Employee Retention Tax Credit?

Eligibility for the Employee Retention Tax Credit depends on specific criteria related to your business operations and financial performance during the pandemic. Businesses must meet one of two primary conditions for a given calendar quarter:

• Government Mandated Shutdown: Your business experienced a full or partial suspension of operations due to a government order limiting commerce, travel, or group meetings due to COVID-19. This includes restrictions on capacity, hours of operation, or types of services offered.

• Significant Decline in Gross Receipts: Your business experienced a significant decline in gross receipts. For 2020, this meant gross receipts for a calendar quarter were less than 50% of gross receipts for the same calendar quarter in 2019. For 2021, this threshold was reduced to less than 80% of gross receipts for the same calendar quarter in 2019.

Specific Eligibility Considerations

Beyond the core criteria, several other factors influence ERC eligibility. Understanding these nuances is crucial for an accurate claim.

Full-Time Equivalent (FTE) Employee Count: The number of full-time equivalent employees impacts which wages qualify. For 2020, this threshold was 100 employees; for 2021, it increased to 500 employees. This distinction determines whether wages paid to all employees or only non-working employees qualify.

Aggregated Group Rules: Businesses under common control or ownership must aggregate their employees and gross receipts to determine eligibility. This prevents larger entities from artificially separating into smaller ones to qualify.

PPP Loan Recipients: Initially, businesses that received a Paycheck Protection Program (PPP) loan could not claim the ERC. However, subsequent legislation allowed PPP recipients to claim the ERC, provided the same wages were not used for both programs.