The Employee Retention Tax Credit

If you’re here, you’ve likely heard of the ERC – also known as The Employee Retention Credit.

You’re also probably curious if it applies to your business, whether you qualify, and the best way to get it. (Hint … you’re in the right place with Innovation Refunds.)

So, let’s dive in:

What is it? The ERC is a payroll tax refund that helps eligible businesses receive a significant refund per employee they kept on payroll during the pandemic.

Why does it exist? The ERC was developed to encourage and support employers who retained existing employees throughout 2020 and for the first three quarters of 2021 by offering a generous payroll tax refund through the IRS.

If you’re a small-to-medium-sized business, it’s likely that COVID-19 negatively impacted you. That’s why the ERC was put into place - to help eligible businesses recover and thrive!

What is the Employee Retention Tax Credit?

As we mentioned above, the ERC is a refundable tax credit for businesses that continued to pay employees while experiencing a full or partial shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to Dec. 31, 2021.

According to the IRS website, the Employee Retention Credit is available to tax-exempt organizations. It also may be available to tribes if they operate a trade or business.

A surprising number of small and medium businesses have yet to claim the ERC. From lack of awareness to confusion around changing regulations, the ERC remains vastly underutilized and misunderstood. In fact, according to a survey, only 67% of business owners have heard of the ERC and of those businesses who have heard of the program, 68% still have not taken advantage of it.

Some employers may shy away from taking advantage of this program, but they shouldn’t! The IRS itself issued a press release that “urges employers to take advantage of the newly-extended employee retention credit.”

A little about the PPP:

You’ve probably heard about the PPP before (Payroll Protection Program). 

Both the ERC and the Paycheck Protection Program (PPP) originated from the CARES Act, created in 2020 to provide relief for small and medium-sized businesses from the economic damage of the coronavirus pandemic.

The PPP was widely promoted as a convenient and readily accessible financial relief solution. Over 7 million loans were approved, and over $950 billion in funds have been distributed.

By contrast, the ERC needed more awareness and education from the start. In 2020, only about 8% of eligible businesses applied for ERC funding and an estimated 1.2 million companies with 4 – 500 employees have not yet filed for ERTC.

The ERC program also underwent several regulatory changes that contributed to further apprehension and misunderstanding. As a result, many companies only discovered the program after the credits were set to expire. 

According to the data, the number-one reason businesses did not claim the refund was misconceptions about the program and what it offered. Companies also reported that a lack of information and complexity surrounding the program were contributing factors that deterred them from applying.

Cares Act 2020

Just to rewind a little bit: Due to financial suffering across the country during the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help get businesses back on their feet — with a special section called the Employee Retention Credit (ERC). 

At this point, the ERC was not accessible to business owners who claimed PPP. However, the IRS loosened the rule in December 2020, so businesses could claim both ERC and PPP.

How much do businesses get back for the ERC?

The typical gross refund amount for Innovation Refunds’ clients is approximately $22,000 per employee as of May 2023. Our average gross refund amount per business is $298,654.66. The amount your business receives will depend on the accuracy of your payroll records, involvement in other relief programs, healthcare statements, owing back taxes, any deductions you may have previously taken, and other factors.

These factors may also reduce the gross refund amounts noted above, which may mean that the net refund is lower.

What should I know about Employee Retention Credit eligibility?

First, the ERC is available for SMBs with 500 or fewer employees that have experienced a decline in gross receipts (defined by the IRS as the total amounts the organization received from all sources during its annual accounting period).

Second, the ERC is available to businesses that faced a full or partial suspension of operations due to governmental mandates (this especially includes but is not limited to public-facing service businesses, such as restaurants, movie theaters, nail salons, et. al).

If my business received PPP can my business still qualify for the ERC?

The good news is… yes!  But there’s a catch: The ERC cannot be claimed on wages paid with the funds from a forgiven PPP loan. But the update in 2021 to the ERC was a game changer – and it allowed businesses to claim ERC and PPP.

If you received a PPP loan, then adding an ERC on top of that money back is a huge win. However, the rules regarding your ERC AND getting PPP loan forgiveness are complex and may require the help of an ERC company to receive the refund your business may be eligible for.

For example, choosing which wages to report for ERC vs. PPP can impact the refund amount for your ERC and the status of your PPP loan. When utilized correctly, you’ll have the best of both pieces of legislation, allowing you to recover from the impact of the pandemic and grow your business.

The difference between ERC and PPP:

1. Type of funding (forgivable loan vs. tax credit, time to receive the money, PPP deadline has passed, etc.)
2. Both programs cannot cover the same wages (no double dipping)

Considerations for applying for ERC and PPP:

One thing to note:

The PPP was a forgivable loan. The ERC returns the payroll taxes that your business has already paid. Once your business receives the ERC funds from the US Treasury, it is yours to use how you see fit.

A couple more things to note:

1. Employers can only claim the ERC on wages outside of what the PPP loan covered.
2. You may qualify for the ERC retroactively by filing an amended Form 941-x.
3. You will need to amend your corporate tax returns for the years in which the ERC is received. This could result in a tax liable event. Please consult with one of our independent tax attorneys to learn more.

What can ERC funds be used for?

There are many uses for putting the refund back into your business, including paying off debts, operating expenses, hiring and retaining employees, and ultimately growing your business.

Some other ways you could use the funds:

The ways in which you could improve your business are nearly endless!

That’s why Innovation Refunds exists – to help eligible small and medium-sized companies stop leaving money on the table.

Can my business qualify if revenue increased?

As we noted (and you experienced), nearly all businesses underwent hardships and interruptions to their services and offerings.

If your business was subject to any sort of government restriction which interfered with operations during the pandemic, you may be eligible for the Employee Retention Credit. 

Even if your revenue increased in 2020 and/or 2021, you may still be able to qualify if it experienced a full or partial suspension from government shutdowns.

What businesses are eligible for the ERC?

If a business was ordered to fully or partially shut down or if their gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021).

You might also note that certain businesses are not eligible for the ERC, including state and local governments and their instrumentalities, small business investment companies, and businesses that receive a PPP loan. 

Small and large employer determination

Are you a small employer or a large employer? Chances are you’re thinking big. But your headcount still matters!

It’s important to note that your credit will be determined by your organization’s size in 2020 and 2021. Ultimately, your number of employees is determined by the number of “full-time employees,” which we will address in the next section.

To keep it simple -- for small employers, all wages count as qualified wages. For large employers, only the wages paid to an employee for not providing services count as qualified wages.

‍So, are you small or large?

In 2020, an employer is considered large if it averaged more than 100 full-time employees during 2019.

In 2021, an employer is considered large if it averaged more than 500 full-time employees during 2019.

Full-time vs. part-time employee classifications

The size of your business is one of the top factors for receiving the most value from the ERC; therefore, classifying full-time employees when considering large or small employer status is critical.

In the CARES Act, Congress decided that “full-time employees” for ERC purposes would be used as it is defined by the Affordable Care Act. Per this, a “full-time employee” (FTE) is an employee who worked either 30 hours per week or 130 hours per month.

Is the Employee Retention Credit taxable income?

The short answer is no. The refund is not taxable under IRC § 280C. However, because these refunds are payroll tax credits, they’ll reduce the amount your business can expense for payroll in each qualifying quarter. 

However, the reduction of expenses could result in an increase in net income — which is potentially taxable. State tax laws regarding the ERC refund vary, so it’s recommended to consult with an ERC company before adjusting your books. 

How do you fill out Form 941-X for Employee Retention Credit?

To fill out form 941-x, it might first help to understand the F941.

If your company failed to claim the ERC from the first quarter of 2020 to the third quarter of 2021, you can still file a Form 941-X to fix your previous F941 form and take advantage of the ERC.

By filing Form 941-X within three years after the original F941 was filed – or two years removed from the date you paid your F941 tax – your business may qualify for the ERC!

Can a closed business apply for the ERC?

The short answer is … yes! If your business was open in 2020 during Q3 or Q4 or during Q1-Q3 in 2021, it may be able to claim the ERC. Additionally, the ERC can also be claimed before or after a business sale.

Do new businesses qualify?

If your business opened after February 15, 2020, it may qualify. According to the IRS, “A recovery startup business can still claim the ERC for wages paid after June 30, 2021, and before January 1, 2022. Eligible employers may still claim the ERC for prior quarters by filing an applicable adjusted employment tax return within the deadline set forth in the corresponding form instructions.”

Is there a maximum ERC credit?

Eligible businesses can receive a refund of up to $5,000 per employee for all of 2020 and up to $7,000 per employee kept on the payroll for each quarter for Q1 through all of Q3 of 2021. 

The credit for ERC 2021 is 70% of qualified wages paid per employee 

‍What is the ERC Affiliate Program?

As a business owner, you likely have a network of other entrepreneurs you trust and rely on. Why not help out your SMB network, while generating affiliate commissions?

The Innovation Refunds Affiliate Program is for qualified professionals and agencies that serve small and medium-sized businesses. For every qualifying activity, we’ll pay you a referral commission.

What are the benefits of partnering with Innovation Refunds?

Taxes aren’t easy! Even if you have a certified public accountant (CPA) on your payroll, your business could benefit from using an ERC company to apply for the ERC.

They will compile and thoroughly review every application to make sure there is no missing documentation. Their job is to make sure that your business gets the money it qualifies for from the US Treasury. Our independent tax attorneys are experienced in the field and aware of the changes, limitations, and ERC nuances surrounding your business’ claim.

Here’s why you might consider an ERC company (such as Innovation Refunds) when reviewing the ERC:

How to Apply to the ERC with Innovation Refunds

How long does the ERC Refund process take?

As we mentioned, it’s easy to get started to see if you qualify for ERC assistance.

From there, we’ll help you file your claim, then if approved, you’ll get your checks in the mail from the US Treasury. That said, multiple factors can affect the amount of time it takes to start receiving your business' refund and checks are issued for each qualifying quarter.

Typically, our clients receive their first check in 4-7 months following the submission of a claim to the IRS, with subsequent checks coming after that.

With the ERC, eligible small and medium-sized businesses everywhere have the opportunity to recover from the pandemic and empower their business for growth. By starting an application, you can find out if your business may be eligible to submit an ERC claim so you can take the next step towards preparing your business for financial uncertainties.