A Complete ERC Tax Credit Guide for 2024

The worldwide pandemic had us grappling with many issues, from financial, to economical, opening an opportunity for the government to rise to the occasion. One of the installations is the ERC or employee retention tax credit.

Owing to the pandemic, around 200,000 U.S. firms permanently closed down businesse. In addition, about 8.5% of establishments in the US took the same path in the last couple of years. However, during that period, some businesses stayed afloat and reached for a life jacket, namely the ERC.

Recent update

The IRS announced on 14, Sept, 2023, that a pause would be placed until the beginning of 2023 on processing new ERTC claims. Such a decision was taken to counter the surge of claims. 15% or 540,000 of the total 3.6 million claims have poured in over the past 90 days, as reported by the IRSEvidently,.

The organization has reported that any claim received by the IRS before September 14th will carry forward, however, at a slower pace. The IRS has also allowed the withdrawal of any pending claims only if the business thinks that it no longer qualifies. Since the program kicked in 2020, the IRS has initiated an investigation of about $2.8 million in ERTC claims.

How did the employee retention tax credit or erc originate?

Evidently, the decision of downsizing for cost-saving had not only crossed owners’ minds but was brutally executed by many.

However, laying off employees has a cascading effect on several businesses. Layoff means no steady salary, translating into low spending, and negatively impacting the non-essential business revenues.

The government had to come up with a plan to put an end to this vicious cycle. Federal authorities were forced to launch several relief programs for the greater good of the citizens.

Hence as a countermeasure to the Coronavirus aftermath, the US Federal Government launched an initiative under Coronavirus Aid, Relief, and Economic Security Act (also known as the CARES Act), signed on March 27, 2020.

Under the CARES act, two employee retention initiatives were designed(to discourage layoffs) in small businesses– Payroll Protection Program(PPP) and Employee Retention Credit (ERC).

What is the employee retention tax credit?

Under PPP, the government would release funds based on 2.5 months of payroll and a minimum of 80% of the funds should go towards payroll to be eligible for forgiveness. PPP funds ensure companies don’t run out of business by supporting them in paying off their employees.

In ERC tax credit, small and mid-sized organizations can claim credits (or refunds) for a percentage of payroll every quarter that the company qualifies. Keeping misconceptions at bay, ERC is not a loan, it is a tax credit that businesses can claim based on certain eligibility criteria.

So, the ERC turned into a huge tax relief for businesses that faced harsh times at the onset of the pandemic. Moreover, the incentive of employee retention came as good news for the businesses and their employees. Clearly, a win-win situation!

Critical questions[+ faqs] about employee retention credit that everyone should know

Is ERC still an active employee retention credit tax program?

On the 14th of Sept, the IRS announced that it would stop processing any new ERC claims until at least the end of 2023. Therefore, numerous businesses have either filed and received the refunds, filed but not yet had the claims processed, or processed the file before the statute of limitations ends, allowing the credit to be claimed for the year 2020 or 2021.

How does employee retention credit work?

Basically, there’s a qualification process that tells businesses whether they can claim ERC or not. On qualifying, all employers who took a loan out of the PPP(Paycheck Protection Program) can get a credit of up to 70%( increased from 50%) of qualified wages paid from March 13th to December 31, 2020, which includes eligible health insurance expenses.

Who qualifies for the employee retention credit?

A few basic eligibility criteria for ERC start with;

The employer is a private-sector and tax-exempt organization.
Employer carried out business(partially or fully run) during the calendar year 2020.
Employer needs to show a significant decline in business—less than 50% of comparable gross receipts compared to 2019.
In case, you are trying to qualify for 2021, the decline in gross receipts should be by 80% compared to the same time period in 2019.
If your business didn’t exist in 2019, compare the gross receipts to 2020.
The CARES Act is not valid for self-employed individuals for their wages. ERC credit is restricted for employee wages, not for specific individuals related to you in any way.

What are qualified wages for the employee retention credit?

Qualified wages are categorized as all the wages paid by employers to employees between March 12, 2020, and before January 1, 2021. In 2020, the ERC was 50% of up to $10,000 in wages paid per employee.

In 2021, ERC increased to 70% of up to $10,000 in wages paid per employee per quarter for Q1, Q2, and Q3. A maximum of $26,000 per employee. However, startups can claim up to $33,000 per employee.

What is the deadline for employee retention credit?

It’s important to note that the program officially ended in 2021. But, companies that paid wages through March 12, 2020, and before January 1, 2021, and witnessed a partial or significant decline in business can still apply for the ERC credit. The deadlines for filing the ERC has remained unchanged. However, the businesses filing claims namely from Q2 to Q4 of 2020 have until 2024, April 14th.

Is the employee retention credit taxable income?

Employees don’t need to pay additional taxes on income covered by ERC. Even employers can forgo tax on ERC as it is treated as a business expense.

Can employers claim employee retention credit and PPP?

Earlier, employers couldn’t claim the ERC and PPP together. Consolidated Appropriations Act (CAA) passed in December 2020 cleared the air by notifying that qualified employers can take advantage of employee retention credit and PPP. The qualified wages are treated as payroll costs. Simply put, an employer is not allowed to claim the same payroll cost as ERC wage and PPP loan.

What can employers spend the employee retention credit on?

Let’s make it crystal clear, the purpose of employee retention credit is not to spend the amount on anything the employer wants. It is a tax credit that is claimed for 70% of up to $10,000 in wages paid per employee per quarter.

Do employers have to pay back the employee retention credit?

ERC is a credit offered by the government to employers. The amount is reimbursed by the government for paying wages to employees during the troubled times of the pandemic. It is a grant that you are entitled to for staying in business. Hence, you don’t need to pay anything back to the IRS.

How much is the ERC credit in 2024?

The ERC credit is increased to 70% in 2021 and is applicable in 2024.

When does the employee retention credit end?

The ERC policy was launched in light of the pandemic to help struggling companies and encourage employment. Companies are no longer eligible to get the benefit of the employee retention tax credit. However, for eligible companies in business during March 12, 2020, and before January 1, 2021, can claim tax until 2024(and 2025 in some cases).

When does an employee retention credit refund arrive?

As per some sources, earlier ERC was reimbursed to the claimants within 4 or 6 weeks. Due to the heavy volume of applications received from employers, there’s a delay of 10-12 months. Yet, the IRS discourages filing another claim as it’ll only delay the process even further.

Credit services companies would indeed charge a decent commission for claiming the ERC. The positive side is employers can receive a grant of up to $26,000 per employee, which is not a small amount.

What changed in employee retention credit after coming under the CARES act?

The employee retention tax credit was applicable for companies that completely ran out of business. After undertaking of CARES act, ERC was opened for all businesses that managed to barely keep their shops open. This means thanks to the CARES act, the coverage of ERC was expanded for the number of businesses struggling during the pandemic.

Do owner’s wages qualify for the employee retention credit?

Employers who own less than 50% of the business or jointly own less than 50% are eligible for the retention tax credit. Not all businesses and employers can claim ERC.

Information you need before filing your employee retention credit in 2024

How to claim employee retention credit?

The process needs employers to file Form 941 with the IRS. There is a qualification process that needs companies to identify their company and basic details. The same form will help determine if the company was impacted by the pandemic. Start here!

Post application submission, the IRS team will thoroughly review the applications and check if your business faced a significant disruption due to Covid-19.

How to calculate employee retention credit?

As discussed earlier in the article, employers can get a refund of 70% of the qualifying wages paid to employers through 2021. Employers must start by finalizing the exact number of employees and qualifying wages disbursed during the pandemic period.

Now, you can multiply the qualifying wages by 70%, to determine the employee retention credit. Let’s see a quick example.

Assuming an employer has 20 employees on payroll during the pandemic and the employer pays each employee $10,000 in qualifying wages during a single quarter, the employer would receive a credit of $10,000 x 20 employees x 70% which is $140,000 for that quarter.

How to file the employee retention credit 2024 application?

We’d recommend taking help from the ERC service providers. They will charge a commission but get you through the process smoothly.

What are the best employee retention credit services?

A few best employee retention service providers in the market are:

Where can I find a tool to help me calculate my potential employee retention credit?

The ERC credit service providers enlisted above are well-equipped with qualification and calculator tools. All websites have sufficient details to guide you through the process and how to claim the tax.

Why is it important to apply for the employee retention tax credit and can you still apply for it?

2020 and 2021 were definitely not the most cherishable years for businesses. The pandemic left employers and employees stranded with no clue of the next course of action. While many companies barely made it through the time, others closed the shutter permanently.

In such a trying time, the PPP and ERC initiative started by the government to help companies stay in business and employees on payroll was an unexpected sigh of relief. Losing a good deal of money by not taking advantage of it is unreasonable.

We recommend checking your business’s eligibility and then deciding if you can claim the ERC tax credit or not. Good news–you are still eligible to claim the employee retention tax credit. Grab the opportunity with both hands.