The CARES act created the Employee Retention Credit (ERC) as a way to help companies keep workers employed throughout the pandemic. There have been changes to the law along with some grey areas surrounding how aspects of the ERC are supposed to be applied. While there may be additional changes with upcoming legislation, the IRS has offered some insight into the ERC as it currently stands.
You may want to talk with your tax advisor to see how the ERC may apply to your unique situation, but here are some things you’ll want to know first.
What is the ERC?
The ERC is a refundable payroll tax credit created to support companies dealing with the economic impact of the pandemic. It is not a loan or a deferral, and it does not have to be repaid.
Companies that meet certain criteria are eligible to apply for the ERC. You will need to weigh several factors to determine if you’re eligible, but it’s important that you understand the following points:
- It is possible to be eligible to for the ERC even if you obtained a PPP loan.
- You may be able to claim the ERC now even if you were not eligible in 2020.
- Eligibility is based on a reduction of revenue OR partial suspension, not both.
- The IRS has many interpretations of ‘partial suspension’ for the purposes of the ERC.
Determining ERC eligibility
To determine if your company is eligible for the ERC, you’ll need to some key details about your business. It will be easier to walk through the process if you gather the information before you begin. Here are some things you’ll need to get started:
- Quarterly payroll tax returns
- Summary of your quarterly revenue
- Employee wage details along with dates
- Summary of lines of business (i.e. line of business, services and products)
- Details regarding wages used for Paycheck Protection Program, if applicable.
- Detail regarding wages to paid to employees for time spent not working
This tool makes it easy to see if you’re eligible. Just remember that you need to check eligibility for each year by selecting the year at the top of the form and entering the requested data.
Claiming the ERC
If you’re eligible, you can claim the ERC by calculating the amount of the credit and reducing your employment tax deposits accordingly. You’ll need to account for the credit on your 941 as well. Companies with 500 or fewer full-time employees in 2019 may be able to request advance payment of the credit on Form 7200, Advance of Employer Credits Due to COVID-19. Currently, for 2021 advances are not available for companies with over 500 employees.
Determining ERC eligibility and the amount of the credit can be complicated. It can also be tough to maximize your credit while ensuring that you’re following the laws correctly. When in doubt, consult with a tax professional.
Learn more about the ERC with our list of FAQs.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.