ERC Funding: Overview and FAQS
In June 2021, 6.2 million people in the United States could not work because their employers closed or lost business during the pandemic.
Due to the impact of COVID-19 on the economy, especially on small businesses, the government developed the Employee Retention Tax Credit (ERTC). The ability to claim ERC funding provided an incentive for companies to maintain employees during 2020 and 2021.
Even with the economy showing improvements, businesses continue to struggle. As of March 2022, there are still 2,514,000 people unable to return to work or working fewer hours. Many companies are permanently closed or are still experiencing low business receipts.
If you are a business owner and have not filed an application for Employer Retention Credit (ERC), it is not too late. By following the rules of the three-year look-back, businesses have until 2024 to claim their tax refund.
To learn more, check out our Employee Retention Credit FAQ questions below, then learn how to file for ERC credit in 2022.
What Are ERC and ERTC?
The Employee Retention Credit (ERC) and the Employee Retention Tax Credit (ERTC) are the same payroll credit under different names. ERC funds are tax refunds, not a loan. They do not have to be repaid.
Qualifying employers may file retroactively to receive their refund.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act became effective in March 2020. Its purpose is to offset the impact of COVID-19 on business. The refunds are the creation of the CARES Act.
The CARES Act includes benefits to the healthcare system, large corporations, gig workers, independent contractors, small businesses, families with children, and furloughed workers.
The original program has undergone several changes, improving the ability of businesses to receive relief.
What Are the Changes Made to ERTC?
During 18 months, there were four significant changes to the ERC refund requirements.
At the time of inception in March 2020, the ERC allowed employers with less than 100 employees to claim up to $10,000 in wages and benefits per employee per quarter. The business receives 50% of the wages and benefits it claims, up to $5,000 per employee.
Eligibility requirements for ERC were:
- Closing or reduction in business operations due to government shutdown orders, or
- A loss in gross receipts of 50% or more in comparison with the same quarter in 2019
Businesses receiving Payroll Protection Program loans in 2020 did not meet the initial qualifications. In December 2020, the restriction against receiving both PPP and ERC was removed. Businesses can now claim both, but not for the same wages.
For 2021 businesses with 500 or fewer employees can claim credit for up to $10,000 in wages and compensation per employee per quarter, with an increase of 70% in benefits, or up to $7,000 per quarter.
To qualify for the payroll tax credit, the business must show:
- A closing or a reduction in business operations due to government shutdown orders, or
- A loss in gross receipts of 20% more in comparison with the same quarter in 2019
Eligibility was extended to December 31, 2021, but this was reversed. Businesses can only claim through the third quarter of 2021. This reversal in the last quarter is to offset the cost of the bipartisan Infrastructure Investment and Jobs Act.
Difficulties understanding qualifications and juggling the numerous amendments left many businesses concerned about filing claims correctly.
What are Qualifying Wages?
The qualifying wages must fall between March 12, 2020, and January 1, 2021. Qualifying wages are those paid to employees unable to work due to COVID-19 shutdowns or a significant decline in business operations.
During the qualifying period, you must pay the employee a minimum of $600 in wages during each quarter you claim. Wages include salary or hourly wages, commissions, health insurance, or other compensation subject to FICA taxes.
You must review the requirements for each year separately, as there are variations in the qualifying factors and refund amount.
Do Tips Count as Eligible Paid Wages?
When calculating eligible wages for tax credits, restaurants and other hospitality companies can include tips employees receive that meet these requirements:
- You can claim tips from customers exceeding $20 per month as eligible wages
- You can receive both §45B credit and ERTC for the same wages
This adjustment to allowable wages went into effect in August 2021 but can be retroactively applied to both 2020 and 2021 payroll taxes.
How Many Employees Can I Have and Still Qualify?
Your business records must show 100 or more full-time employees in 2019 if you wish to claim ERC for the 2020 tax year. Qualifying wages are those you pay to employees unable to work because of a decline in gross receipts or a suspension in business operations.
You may only claim wages up to the amount the worker would receive if working during an equivalent period immediately preceding the shutdown. You may claim up to $10,000 in wages per employee per quarter.
If your average was less than 100 full-time employees in 2019, you qualify to claim up to $10,000 in qualifying wages for every employee. This is allowable whether or not they work during a shutdown or period of decline in receipts.
The benefit is available for the 2021 tax year to businesses with 500 or fewer employees. For companies with 500 or fewer employees, the help is only available for employees unable to work during the shutdown or a period of decline in receipts.
What Is a Full-Time Employee?
According to 26 USC § 4980H(C)(4), to qualify as a full-time employee, the person must show an average of at least 30 hours of work per week during 2019. To determine the number of full-time employees in 2019, you take the total number of full-time employees each month of 2019, then divide the total by 12.
If you were not in business in 2019, alternative rules exist for obtaining your refund. Check with your ERC professional for assistance in calculating your refund.
Can the Owner of a Business Collect ERC?
The owner of an LLC is not eligible to collect ERC because their wages come from the business profits, not payroll. There are some situations where the owner may qualify, so check with your ERC specialist to see if you fit the criteria.
Self-employed persons, sole proprietors, and government entities are not eligible. If your business employs staff receiving payroll, those wages may qualify.
If you employ family members, they probably do not qualify for an ERC refund. Family members you may not receive ERTC on include your spouse, children, stepchildren, grandchildren, parents, brothers and sisters, and your aunts and uncles.
Be very careful to avoid miscalculating family members’ wages when applying for ERC. If you claim wages for employees that do not meet the qualifications, you may be subject to fines and penalties.
Most S Corp and C Corp businesses do not meet the qualifications for ERC. The determination is made using numerous factors, including how shareholders relate to each other and the owner’s share.
If the ownership level is less than 50%, or several owners have less than 50% ownership, you may qualify for credit. There cannot be two or more immediate relatives with combined ownership exceeding 50%.
Are Credits the Same for Large and Small Employers?
Small employers can claim wages for all employees during their qualifying quarters. This applies whether the employee was or was not working at the time.
Large employers can only claim wages paid to employees not working due to COVID-19 shutdowns or a reduction in business operations during the quarter.
How Do I Determine Whether I Am a Large or Small Employer?
For the purpose of ERC credit, the size of a business is measured using the number of full-time employees a company shows for 2019.
To qualify as a small business in 2020, the company’s 2019 records must show 100 or fewer full-time employees.
To claim in 2021, the employer’s 2019 records must show an average of 500 or fewer full-time employees for the small business classification.
What Are Gross Receipts?
The process for determining gross receipts is slightly different for taxable and non-taxable entities.
If your business is taxable, you must include:
- Total sales for services and products
- Income from investments, including interest, rent, dividends, royalties, and annuities
- A reduction in receipts is made by adjusting for property used in trade, business, or capital assets sold
- The tax accounting method for income recognition applies
If your business is non-taxable, you must include:
- All gross receipts for the taxable year
- Your tax accounting method for income recognition
- Receipts are not reduced by the business adjusted basis on property used in business, trade, or capital assets sold
To avoid making an error, speaking with a professional specializing in ERC tax refunds is advisable.
Does ERC Have to Be Paid Back?
The ERTC is a 100% refundable tax credit. Qualifying employers can claim the refund against qualifying payroll taxes.
This is not a loan. It is money the government owes you as a refund.
Can I Get ERC With a PPP Loan?
Yes, you can receive ERC even if you also have a PPP loan. When doing your calculations, you need to ensure you are not claiming the same wages on ERTC that you claim on your PPP loan.
The PPP loan only applies to an 8-10 week period of wage expenses. The ERC refund covers a longer time period, and there are no restrictions on how you use the refund.
What Form Do I Use for Filing My ERTC Request?
To retroactively claim the employee retention tax credit, you must submit an amended Form 941-X. You must file the amendment for each quarter you qualify to receive a refund.
You must submit documentation proving your business is eligible for a refund. This includes proof that the company is experiencing a decline in revenue between the calendar quarter you are claiming and the same quarter in 2019.
Addition documentation you must provide includes:
- The location of your business
- A summary of your line of business
- Your quarterly tax returns
- The number of eligible employees
- Details on employee wages, including the date paid
- Details on wages you claim under the PPP program for each quarter you are also claiming on ERC
Filing retroactively can be tricky, and if you do not report information correctly or forget to comply with document requirements, there will be additional delays in receiving your refund.
Are There Plans to Extend or Reenact ERC?
Senator Hassan introduced Senate Bill S-3625 on February 10, 2022. The bill’s purpose is to reinstate the employee retention credit through the 4th quarter of 2021.
The bill has been read twice and is now in committee. If your business suffers from the COVID-19 impact, you may want to visit the page above, where you can leave feedback on the bill.
There is also a bill in the House of Representatives, H.R. 6161, introduced by Representative Miller on December 7, 2021. The last action shows the bill being referred to the House Committee on Ways and Means in December. The bill currently has 110 co-sponsors.
You can visit the page for H.R. 6161 to leave your feedback on the bill.
Where Is My ERC Funding?
The IRS is experiencing a backlog of refunds and delays due to receiving a higher-than-usual amount of amended payroll tax returns. The increase is due in part to the ability of businesses to file for an ERC refund retroactively. As a result, you may expect a delay of six months or more to receive your refund.
In January 2022, U.S. Senator Kirsten Gillibrand requested the IRS expedite the processing of Employee Retention Credit refunds. At that time, the IRS had a backlog of at least 10 million ERTC refunds to process.
The release of a mandatory midyear report to congress on June 22, 2022, by Erin M. Collins, National Taxpayer Advocate, sheds more light on the situation. The report addresses the increasing backlog and delay in receiving refunds.
Before COVID-19, the average time to receive a refund was 4-6 weeks. As of May 2022, there is a backlog of 21.3 million returns awaiting processing. This backlog is the reason you cannot expect to receive a refund for at least six months, and many are taking ten months or longer.
How Can I Get My ERC Credit in 2022?
Getting in touch with an Employee Retention Tax Credit Specialist is the best way to ensure you receive all the ERC funding your business qualifies for.
Contact ERC Smart at 877-630-1617 or check how much you’re eligible to receive using our online form. You will receive an answer in five minutes or less regarding your refund amount.