SBA Employee Retention Credit: How to Qualify and Claim It

The Small Business Administration (SBA) Employee Retention Credit (ERC) is a refundable tax credit designed to help businesses keep their employees on payroll during the COVID-19 pandemic. The credit is available to eligible employers who either had to shut down due to the pandemic or had significant declines in gross receipts between March 13, 2020, and December 31, 2021. The ERC is a valuable resource for small businesses struggling to stay afloat during these challenging times.

The ERC is a significant incentive for small businesses to keep their employees on the payroll, as it provides a dollar-for-dollar reduction in the employer’s share of Social Security taxes. The credit is worth up to 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee, for a total credit of up to $5,000 per employee. This credit can be claimed on quarterly payroll tax filings or can be requested as an advance payment from the IRS.

The ERC has been extended through December 31, 2021, and is an essential resource for small businesses that are struggling to stay open during the pandemic. The credit is available to businesses of all sizes, including non-profits, and can be used in conjunction with other COVID-19 relief programs, such as the Paycheck Protection Program (PPP). Small business owners should consult with their tax advisors to determine if they are eligible for the ERC and how to claim the credit on their payroll tax filings.

Understanding the Employee Retention Credit

The Employee Retention Credit (ERC) is a refundable tax credit that was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. The ERC is designed to help businesses that were impacted by the COVID-19 pandemic. It is available to both small and mid-sized businesses that were able to retain their employees during the pandemic.

The ERC is a tax credit that is applied against the employer’s share of Social Security taxes. The credit is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 per employee per quarter. This means that the maximum credit per employee is $28,000 for the entire year.

To be eligible for the ERC, businesses must meet certain criteria. They must have experienced a significant decline in gross receipts or been subject to a full or partial suspension of operations due to government orders. They must also have retained their employees during the pandemic, even if they were not working.

The ERC is available for wages paid from March 13, 2020, through December 31, 2021. In 2021, the ERC was extended through December 31, 2022, meaning that eligible businesses can claim the credit for qualified wages paid through that date.

It is important to note that businesses cannot claim both the ERC and the Paycheck Protection Program (PPP) loan for the same wages. If a business received a PPP loan, it can still claim the ERC for wages that were not covered by the loan.

Overall, the ERC is a valuable tool for businesses that were impacted by the COVID-19 pandemic. It provides a refundable tax credit that can help offset the cost of retaining employees during a difficult time.

Timeline of the Employee Retention Credit

Initial Introduction in 2020

The Employee Retention Credit (ERC) was first introduced as part of the CARES Act in 2020 to help businesses affected by the COVID-19 pandemic. The ERC provided a refundable tax credit to eligible employers who retained their employees, even if they were not working due to the pandemic. The credit was equal to 50% of qualified wages paid between March 12, 2020, and December 31, 2020, up to a maximum of $5,000 per employee.

Extensions and Modifications in 2021

The ERC was extended and modified several times in 2021 to provide additional relief to businesses affected by the pandemic. The Consolidated Appropriations Act, of 2021, extended the credit through June 30, 2021, and increased the credit rate to 70% of qualified wages. The American Rescue Plan Act of 2021 further extended the credit through December 31, 2021, and increased the credit rate to 70% of qualified wages, up to a maximum of $28,000 per employee for the year.

The IRS also provided guidance on how to claim the ERC for different periods. Notice 2021-20 provided guidance for the period between March 12, 2020, and January 1, 2021, while Notice 2021-23 provided guidance for the period between January 1, 2021, and June 30, 2021. Notice 2021-49 provided guidance for the period between July 1, 2021, and December 31, 2021.

Current Status in 2023

As of March 2023, the ERC has expired and is no longer available to eligible employers. However, eligible employers can still claim the credit for qualified wages paid in 2020 and 2021 by filing an amended employment tax return or Form 941-X. The IRS has also provided guidance on how to claim the credit for these periods in Revenue Procedure 2021-33.

It is important to note that the IRS is currently processing returns in the order they were received, which means that reimbursements for 2020 and earlier will be handled before 2021 returns. Employers who are owed a refund for the ERC should plan for a turnaround time of nine to twelve months.

Overall, the ERC provided much-needed relief to businesses affected by the pandemic, and its extensions and modifications in 2021 provided additional support. While the credit is no longer available, eligible employers can still claim it for qualified wages paid in 2020 and 2021.

Eligibility for the Employee Retention Credit

The Employee Retention Credit (ERC) is a fully refundable tax credit that helps eligible employers keep their employees on payroll during the COVID-19 pandemic. The credit is available to small and midsize businesses, as well as tax-exempt organizations that have been adversely affected by the pandemic.

To be eligible for the ERC, an employer must meet one of two requirements:

  • The employer experienced a full or partial suspension of operations due to a government order related to COVID-19, or
  • The employer experienced a significant decline in gross receipts during a calendar quarter in 2020 or 2021.

Eligible employers can claim the ERC for wages paid after March 12, 2020, and before January 1, 2022. The credit is equal to 50% of qualified wages paid to each eligible employee, up to a maximum of $10,000 per employee per calendar quarter.

Small businesses with fewer than 500 employees are eligible for the ERC, as well as midsize businesses with up to 1,500 employees. Tax-exempt organizations, including charities and religious organizations, are also eligible for the credit.

In addition, the American Rescue Plan Act of 2021 created a new category of eligible employers called “recovery startup businesses.” These are businesses that started operations after February 15, 2020, and have average annual gross receipts of $1 million or less. Recovery startup businesses can claim the ERC for wages paid after June 30, 2021, and before January 1, 2022.

To claim the ERC, eligible employers must file Form 941, Employer’s Quarterly Federal Tax Return, with the IRS. They can also request an advance payment of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Overall, the ERC provides eligible employers with a valuable tax credit that can help them retain their employees during the pandemic.

Calculating and Claiming the Employee Retention Credit

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while either shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. To claim the credit, eligible employers must calculate the credit amount and report it on their federal employment tax returns, such as Form 941, Employer’s Quarterly Federal Tax Return.

Calculating the Credit Amount

The credit amount is equal to 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee, for all calendar quarters. This means that the maximum credit for an eligible employer for qualified wages paid to any employee is $5,000.

Qualified wages are wages paid to employees during the period of economic hardship and can include health plan expenses. An employer can only count qualified wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the economic hardship.

Determining Eligibility

To be eligible for the ERC, an employer must meet one of two criteria:

  1. The employer’s business was fully or partially suspended due to a government order related to COVID-19 during the calendar quarter, or
  2. The employer experienced a significant decline in gross receipts, defined as a decline of 20% or more in gross receipts compared to the same quarter in 2019.

Employers with 500 or fewer employees can claim the credit for all employees, regardless of whether they were providing services or not. Employers with over 500 employees can only claim the credit for employees who were not providing services.

Claiming the Credit

Eligible employers can claim the ERC on their federal employment tax returns, such as Form 941 or Form 944, by reporting the credit on line 11c. Employers can also request an advance payment of the credit by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.

If an employer has already filed their employment tax return and did not claim the ERC, they can file an amended return, such as Form 941-X or Form 944-X, to claim the credit.

It’s important to note that if an employer claims the ERC, they cannot also claim the same wages for the paid sick and family leave tax credits under the Families First Coronavirus Response Act (FFCRA). However, employers can claim the ERC in addition to the Paycheck Protection Program (PPP) loan forgiveness.

Overall, calculating and claiming the ERC can be a complex process, but eligible employers can receive significant tax credits to help keep their businesses afloat during the economic hardship caused by the COVID-19 pandemic.

Interaction with Other Relief Measures

The Employee Retention Credit (ERC) is a refundable tax credit that incentivizes eligible employers to keep their employees on payroll during the COVID-19 pandemic. The ERC can be claimed by eligible employers who experienced a significant decline in gross receipts or a full or partial suspension of business operations due to government orders.

The ERC can be used in combination with other relief measures, but there are some interactions to be aware of. For example, if an employer received a Paycheck Protection Program (PPP) loan, they may still be eligible for the ERC, but they cannot claim the credit for wages that were paid with forgiven PPP funds.

Additionally, wages that are used to claim the ERC cannot also be used to claim the Paid Leave Credit or the Sick and Family Leave Credit under the Families First Coronavirus Response Act (FFCRA). However, if an employer paid qualified wages that were not covered by the FFCRA, they may still be eligible to claim the ERC for those wages.

It is important to note that the ERC cannot be claimed for the same wages that are used to claim the Work Opportunity Tax Credit (WOTC) or the Research and Development (R&D) tax credit. However, eligible employers may still be able to claim the ERC for wages that are not used to claim these other credits.

The ERC can also be used in combination with the Small Business Administration’s (SBA) Debt Relief program, which provides relief to small businesses with SBA loans. However, it is important to note that the ERC cannot be used to pay wages that are already covered by the SBA Debt Relief program.

Overall, eligible employers should carefully consider the interactions between the ERC and other relief measures when determining their eligibility for the credit. By understanding these interactions, employers can maximize their benefits under the various relief programs available to them.

Potential Pitfalls and Scams

When dealing with Employee Retention Credit (ERC), there are several potential pitfalls and scams that businesses should be aware of. Here are some of the most common issues to watch out for:

ERC Scams

The Internal Revenue Service (IRS) has warned about aggressive promoters making offers that seem too good to be true regarding ERC claims. These promoters may offer to help businesses claim the credit, but they often charge excessive fees and may even file fraudulent claims. Businesses should be cautious when working with third-party promoters and should only work with reputable firms.

Fees

While there are no fees associated with claiming the ERC, businesses may need to pay fees to tax professionals or other third parties to help them calculate and claim the credit. Businesses should be sure to understand all fees associated with claiming the credit and should only work with professionals who are transparent about their fees.

Interest and Penalties

If a business claims the ERC incorrectly or fraudulently, they may be subject to interest and penalties. Businesses should be sure to carefully review the eligibility requirements and claim the credit correctly to avoid any potential issues.

Other Pitfalls

In addition to scams, fees, interest, and penalties, there are other potential pitfalls associated with claiming the ERC. For example, businesses may need to provide documentation to support their claim, and they may need to keep records of their employment levels and wages. Businesses should be sure to understand all requirements associated with claiming credit and should keep accurate records to support their claim.

Overall, while the ERC can be a valuable tool for businesses, it is important to be aware of potential pitfalls and scams. By working with reputable professionals and carefully following all requirements associated with claiming credit, businesses can avoid issues and maximize their benefits.

The Role of IRS and Treasury in Employee Retention Credit

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while either shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. The IRS and Treasury play a significant role in administering and providing guidance on the ERC.

The IRS issued detailed guidance for employers claiming the employee retention credit for calendar quarters in 2020 in Notice 2021-20. The notice provides detailed information on eligibility, calculating the credit, and claiming the credit on Form 941. The IRS also issued Notice 2021-23, which provides guidance on the employee retention credit for the first two quarters of 2021.

Additionally, the IRS has provided several FAQs on the ERC, which provide answers to many common questions about the credit. The FAQs cover topics such as eligibility, calculating the credit, claiming the credit, and more. The FAQs are regularly updated to provide the latest information on the ERC.

The Treasury also plays a significant role in providing guidance on the ERC. The Treasury Department issued several press releases and fact sheets on the ERC, providing information on eligibility, calculating the credit, and claiming the credit. The Treasury Department also issued several interim final rules on the ERC, which provide additional guidance on the credit.

In addition to providing guidance, the IRS and Treasury are responsible for administering the ERC. The IRS processes claims for the ERC and issues refunds to eligible businesses. The Treasury Department oversees the IRS’s administration of the ERC and ensures that the credit is administered in accordance with the law.

Overall, the IRS and Treasury play a critical role in administering and providing guidance on the ERC. Their guidance and administration of the ERC help ensure that eligible businesses receive the credit they are entitled to.

Conclusion

The Employee Retention Credit (ERC) is a valuable stimulus program for businesses that were able to retain their employees during the COVID-19 pandemic. Established by the CARES Act, ERC is a refundable tax credit that can be claimed by eligible employers who paid qualified wages to their employees.

While the SBA loans, especially the PPP, are more beneficial for most businesses, the ERC is an excellent option for those who have too many employees for an SBA loan or whose banks already made loans for the $349B available for the SBA loans.

The ERC is available to both small and mid-sized businesses, and it is a grant, not a loan, that businesses can claim. The credit is 50% of the wages paid up to $10,000 per employee, capped at $5,000 per employee. If the amount of the tax credit for an employer is more than the amount of the employer’s share of social security tax owed, the excess is refunded directly to the employer.

To qualify for the ERC, businesses must have experienced a significant decline in gross receipts from March 13, 2020, to Dec. 31, 2021, or have fully or partially suspended operations due to a government order related to COVID-19.

In conclusion, the ERC is an excellent option for businesses that were able to retain their staff employed during the COVID-19 pandemic. The credit can help businesses recover some of the costs associated with keeping their employees on the payroll. Businesses can claim the ERC on their tax returns, and it is a grant, not a loan, which means that businesses do not have to pay it back.

Frequently Asked Questions

How does the Employee Retention tax credit work?

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees while either shut down due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020, to December 31, 2021. It is designed to encourage businesses to keep their employees on the payroll, even when they are not able to operate normally due to the pandemic.

What is the ERC grant application process?

The ERC grant application process involves filling out an application form and submitting it to the Small Business Administration (SBA). The SBA will then review the application and determine whether the business is eligible for the grant. If approved, the business will receive the grant money, which can be used to cover payroll and other expenses.

Who is eligible for the Employee Retention credit?

Businesses of all sizes, including tax-exempt organizations, are eligible for the ERC. To qualify, the business must have experienced a significant decline in gross receipts or been fully or partially suspended due to government orders related to COVID-19.

Can I still apply for the Employee Retention Credit in 2023?

No, the ERC program ended on December 31, 2021. Businesses that did not claim the credit for eligible quarters in 2020 or 2021 will not be able to claim it retroactively.

Who is eligible for the ERC grant?

Businesses that experienced a significant decline in gross receipts or were fully or partially suspended due to government orders related to COVID-19 are eligible for the ERC grant. The grant is available to businesses of all sizes, including tax-exempt organizations.

How do I claim an employee retention tax credit?

To claim the ERC, eligible businesses must report the credit on their federal employment tax returns, specifically Form 941. The credit can be used to offset the employer’s share of Social Security taxes or deposited into the employer’s bank account as a refund. Businesses can also request an advance payment of the credit by filing Form 7200.

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