Why Haven't I Heard About the ERC Program?
A surprising number of small businesses we talk to remain in the dark regarding the Employee Retention Credit (ERC) program. Despite being one of the top payroll tax benefits available, potentially worth hundreds of thousands of dollars, it remains misunderstood and vastly underutilized.
For businesses that kept employees on the payroll during the COVID-19 pandemic, the ERC could mean a refund of up to $26,000 for each full-time employee. However, according to an internal Innovation Refunds survey, only 67% of business owners have heard of the ERC. Of those businesses who have heard of the program, 68% still have not taken advantage of it.
Despite the potential for significant financial support that could go toward everything from operating expenses to paying down debt, the ERC is highly underused.
Fortunately, there is still time to apply. Businesses can retroactively claim refunds for 2020 and 2021—even if they have received PPP funding. In this article, we break down some of the factors that led to this missed opportunity and what you need to know about determining your eligibility and claiming your refund.
Reason #1: Lack of ERC Awareness
Both the ERC and the Paycheck Protection Plan (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 (see reason #2). As a result, many companies only discovered the program after the credits were set to expire.
According to our internal survey, 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.
Reason #2: Changes in ERC Funding Regulations
After launching the ERC in March 2020 under the CARES Act, the IRS made several changes to the program, including the eligibility guidelines and which months and years are claimable. These changes made it difficult to understand who qualified and what refunds were actually available. However, the Consolidated Appropriations Act of 2021 (CAA) introduced several beneficial updates for businesses.
Most importantly, eligible wages were extended from the end of 2020 to June 2021, and the doors were also opened to allow businesses to apply for the refund retroactively.
The CAA also increased the percentage of qualifying wages from 50% to 70% and increased the maximum level of an employee's qualifying wages from $10,000 per year to $10,000 per quarter.
H3:Businesses can qualify for the ERC if they have already received PPP funding
With the passing of the American Rescue Plan in 2021, most small businesses, even those that took out PPP loans, could qualify for the ERC credit and apply retroactively back to 2020. Companies no longer have to choose between the two, with the caveat that you can't claim the same wages used for the PPP and your ERC refund. You may also need to provide documentation showing wages weren't claimed twice, but it still opens new options for businesses that may have been caught between the two.
Is the ERC a grant?
Whereas the PPP was a federally-backed forgivable loan, the ERC was designed as a refundable, advanceable payroll tax credit for employee salaries, wages, and healthcare insurance.
As long as your business meets the IRS qualifications and after any payroll taxes owed to the IRS have been paid, the ERC becomes a tax-free refund that can be used any way a business chooses. There is no requirement to seek forgiveness.
Reason #3: Accounting Experience Matters When It Comes to ERC Calculations
Many business factors need to be considered when determining ERC eligibility and calculating refunds. Unfortunately, many accountants don't have specific knowledge or ERC experience to offer reliable advice.
This has led to many missed opportunities for small businesses. When working with a CPA or tax attorney, it's critical that they have experience with the ERC and a clear understanding of your business' revenue, what wages are eligible for the program, what government shutdown ordinances affected your business, and the tax code related to the ERC.
If you have any questions about how your business should calculate the ERC, Innovation Refunds has a network of over 100 independent tax attorneys, CPAs, and tax professionals who can help ensure compliance with IRS regulations.
Reason #4: Difficult Tax Code
The tax code surrounding the ERC is challenging to navigate, which makes it even more vital that you work with the right accounting professionals.
The ERC is a payroll tax credit unrelated to your business income tax returns. This requires a series of payroll tax filings that some tax or accounting professionals may not have experience with. If your business received PPP funding and you're applying for the ERC funding program, your tax preparer must produce proper documentation indicating you are not claiming the same wages for both.
Some accountants incorrectly advise businesses that they do not qualify when they are, in fact, eligible to receive funding.
How to Calculate the ERC
The ERC calculation is based on several factors, including total qualified wages (70%) paid to your employees, including health plan expenses. You must also provide detailed information on your business, the number of employees, hours worked, wages paid, PPP loans received, qualifying quarters, group health premiums, and any participation in other government programs.
While you may be able to claim wages for both 2020 and 2021, there are different calculations for each year:
- The ERC refund equals 50% of qualified wages paid for each calendar quarter
- Businesses can receive a maximum credit of $5,000 per employee
- Only available to businesses with an average of 100 or fewer full-time employees in 2019
- The ERC refund equals 70% of qualified wages paid for each calendar quarter
- Businesses can receive a maximum credit of $7,000 per employee— up to $28,000 per employee for the year
- Available to businesses with an average of 500 or fewer full-time employees in 2019
Reason #5: Businesses Qualify for the ERC, Not Workers
It is important to note that the ERC program was created to support businesses that retained employees on their payroll during the pandemic. The refund is not available to individuals or non-employment businesses—only companies that kept their employees working during the pandemic can claim it.
Who Qualifies for the ERC Program
If your business kept employees on the payroll and was impacted by the pandemic, you're likely eligible to apply.
According to the IRS, the ERC refund is available to employers that experienced business disruption or economic hardship due to COVID-19, including government orders or significant revenue declines—although a revenue decline is not required. This applies to essential and non-essential businesses and includes disruptions such as supply chain interruptions, reduced hours, price increases, reduced services offered, and even the inability to travel for the purpose of business.
Determine Your Businesses Eligibility Today
The ERC is an invaluable and accessible program that may be able to help eligible businesses recoup up to $26,000 per employee.
To find out if your business is eligible for the ERC program, Innovation Refunds can help determine your potential eligibility in around 8 minutes.