Should You File for the Employee Retention Credit?

By Jay Woods

As businesses of all sizes and in all industries became directly or indirectly affected by regulations and shutdowns caused by the COVID-19 pandemic and the resulting economic downturn, it became clear that U.S. companies needed significant financial assistance to remain open.

The federal government authorized billions of dollars in aid specifically for businesses through the Employee Retention Credit (ERC) within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). A refundable employment tax credit for eligible employers based on qualified wages and health plan expenses, the ERC allowed employers to use the funds to continue to pay existing employees and keep business running and staff working during the economic fallout caused by the Coronavirus.

Employers have been working hard to stay afloat during the pandemic. They simply don’t have the bandwidth to manage a constantly shifting business operations environments, learn and adhere to local, state and federal regulations and discover the ins and outs of the ERC to see if they are eligible. There are millions of unclaimed dollars available and nearly any company impacted by the pandemic is eligible to claim their credit. Businesses need to take advantage of this opportunity before funds run out, or the three-year claims window closes.

5 Reasons to Apply

• Most Businesses Qualify: The COVID-19 related criteria a business must meet to qualify for the ERC include a) the business was fully or partially shutdown or had to reduce hours due to a government order; b) employers saw a significant decrease in gross receipts in 2020 or 2021 when compared to 2019 gross receipts; c) the business is a recovery startup, operational in the third and fourth quarters of 2021.

• Receive up to $26,000 per employee: When first introduced as part of the CARES Act in 2020, the maximum credit allowable under the ERC was $5,000 per employee. With its renewal and expansion under the Consolidated Appropriations Act (CCA), 2021, the maximum credit increased to $21,000. When the ERC and the Paycheck Protection Program (PPP) were rolled out under the CARES Act, businesses had to choose which to use. Many selected PPP because it was easier to sign up for a Small Business Administration-backed loan than to learn the details of eligibility for ERC. However subsequent legislation expanded the eligibility requirements for employers so that they could now receive both, making this a can’t-miss opportunity for businesses.
  

• It’s Retroactive: Though the Infrastructure Investment and Jobs Act (IIJA) of 2021 moved up the ERC’s expiration date, effectively repealing the program for the fourth quarter of 2021, companies are still allowed to submit their payroll tax filings for the covered periods. Employers who filed their payroll taxes in 2020 were able to deduct the money directly from their quarterly payroll taxes at that time. Those who didn’t file in 2020 or who are claiming the ERC for the first time on their payroll taxes in 2021 will be refunded for quarterly filed periods.

• It’s a Cash Refund: The ERC is a federal credit taken on a business’ quarterly payroll taxes, not the business’ taxes, based on how many full-time employees (30+ hours) the company had for the eligibility period.  The credit calculation is based on qualified wages paid per employee each quarter. In 2020 the refundable tax credit was 50% of qualified wages up to a $5,000 maximum. In 2021 it was 70% of qualified wages up to $21,000.  The IRS issues a refund check in the amount of the credit claimed.

• It’s Easier Than You Think: If a business meets the eligibility requirements for the ERC, the credit can be claimed on previously filed payroll tax forms. ERC specialists working in accounting departments and for tax preparers can quickly evaluate whether a company is entitled to the credit and provide any needed guidance. If the criteria are met, these professionals can file amended payroll tax returns for the qualifying quarters and submit them to the IRS.
  

In addition to the ERC, the federal government has introduced other credits designed to help businesses weather the long-term effects of the pandemic and to encourage both innovation and the employment of American workers. Companies should talk with their tax preparers about these additional credits available to them including the Research & Development (R&D) tax credit, available to companies developing new or improved business components, and the PPP forgivable loan program, also established during the CARES Act and implemented and backed by the Small Business Administration.     

Jay Woods is founder and President of Omega Accounting Solutions where he is responsible for the company’s business development and strategic planning. With 20 years of experience in financial management, business leadership, and corporate strategy, Woods’ focus is on building long-term strategic partnerships with clients and helping small business owners access a full-functioning accounting department. For more information about qualifying for the ERC and receiving a free evaluation from Omega Accounting Solutions, visit erc.omega-accounting.com/erc-specialist/.