News

Shawn M. Govern & Tyrice J. Denson

The deadline for employers to claim the Employee Retention Credit (“ERC”) is quickly approaching. Employers are likely aware of the Paycheck Protection Program (“PPP”) that was created during the COVID-19 pandemic. However, many businesses have not taken advantage of the ERC. Employers should meet with their tax professionals to determine whether they qualify for the ERC and amend their taxes before the upcoming deadlines in 2024 and 2025. This article describes what the ERC is, explains who is eligible to receive the ERC, and provides readers with information regarding deadlines and next steps.

What is the ERC?

The ERC was implemented to encourage employers to retain employees during the COVID-19 pandemic. Employers eligible for the ERC can be reimbursed 50 percent of up to $10,000 of wages per employee in 2020. In total, businesses can be reimbursed up to $5,000 per employee in 2020.

Additionally, Eligible employers can be reimbursed 70 percent of up to $10,000 of wages per employee for each of the first three quarters of 2021. This means that employers can be reimbursed up to $7,000 per employee for each of the first three quarters in 2021. Therefore, employers can be reimbursed up to $21,000 per employee for 2021.

Who is eligible for the ERC?

Employers are eligible for the credit in 2020 if they meet either of the following criteria: (1) the business sustained a full or partial suspension of operations due to a government order or (2) the employer experienced a significant decline in gross receipts during 2020. The Internal Revenue Service (“IRS”) provides that a significant decline begins in the quarter when a business’s gross receipts for that calendar quarter are less than 50 percent of gross receipts for the same calendar quarter in 2019. The IRS also provides that the significant decline ends in the quarter when gross receipts for the calendar quarter are more than 80 percent of the gross receipts for the same calendar quarter in 2019.

For 2021, employers are eligible for reimbursement for each quarter where the employer’s gross receipts for the calendar quarter are less than 80 percent of gross receipts for the same calendar quarter in 2019.

Furthermore, the IRS created special eligibility rules for employers that qualify as a recovery startup business. To qualify as a recovery startup business, the business must meet the following criteria: (1) the business began operating after February 15, 2020, and (2) the business had average gross receipts under $1 million for the three-year taxable period that ends with the taxable year that precedes the quarter for which the credit is being claimed. The IRS limits credits for a recovery startup business to a total of $50,000 per calendar quarter. Additionally, recovery startup businesses can claim the ERC for the fourth quarter of 2021.

Employers should also be aware that they can still be eligible for ERC if they previously received PPP loan forgiveness. However, wages that were reported as payroll costs for PPP loan forgiveness cannot also be used to claim the ERC.

When is the deadline to apply?

To take advantage of these tax credits, employers should amend their taxes for each respective quarter. Taxes can be amended up to three years after they are filed. Quarterly tax forms submitted for 2020 are considered filed on April 15, 2021. Therefore, business owners must amend these taxes by April 15, 2024, to claim the ERC for 2020. Quarterly tax forms submitted for 2021 are considered filed on April 15, 2022. Therefore, business owners must amend these taxes by April 15, 2025, to claim the ERC for 2021.

Business owners should contact their legal and tax professionals regarding their next steps. Additionally, business owners should be cautious about using third party services to claim the tax credit as the IRS has issued several warnings about scammers looking to obtain fees and personal information.  

If you have any questions regarding the ERC, please contact Shawn Govern at smg@dewittllp.com or 262-753-2867.

Source:

Employee Retention Credit, Internal Revenue Serv., https://www.irs.gov/coronavirus/employee-retention-credit (last visited Jul. 10, 2023).