Matter & Substance
  September 13, 2022

Businesses Can Still Apply for the Employee Retention Credit

In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s employee retention credit. Navigating and interpreting the complicated details of the legislation is necessary to determine eligibility and calculate an accurate ERC.
However, the requirements and stipulations for eligibility have changed as the Act has passed hands, and updates to its provisions have come from the Relief Act of 2021, the American Rescue Plan Act of 2021, and the Infrastructure Investment and Jobs Act (IIJA). Although businesses can no longer pay wages to claim the Employee Retention Tax Credit, they have until 2024 to retroactively claim the credit by filing an amended tax return.

What does the CARES ERC entail?

The Employee Retention Credit was designed to encourage businesses to retain employees. For those businesses "significantly impacted by COVID-19," the Employee Retention Tax Credit is fully refundable against payroll taxes.

Employers are eligible for a credit for 50% of up to $10,000 in qualified wages paid between March 12 and December 31 of 2020. The ERC was expanded significantly for the 2021 tax year, increasing the per employee maximum to $7,000 per employee in 2021 and expanding the definition of “small business” under the program umbrella to 500 from 100 employees.

According to the IRS, eligible businesses that experienced a decline in gross receipts or were closed due to government order and didn't claim the credit when they filed their original return can take advantage by filing amended employment tax returns. For example, businesses that file quarterly employment tax returns can file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund to claim the credit for prior 2020 and 2021 quarters.

Except for a recovery startup business, most taxpayers became ineligible to claim the ERC for wages paid after September 30, 2021. 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 in the corresponding form instructions.

Common misconceptions about eligibility

The following are reasons why some people think they do not qualify for the ERC:

My business didn’t shut down during the pandemic. Even a partial suspension order by the federal, state, or local government of your business could potentially qualify you for the credit. This includes:

  • Partial shutdown

  • Disruption in business

  • Inability to access equipment

  • Limited capacity

  • Shutdowns of supply chain or vendors

  • Reduction in services offered

  • Reduction in hours to accommodate sanitation

  • Shutdowns of some locations and not others

  • Shutdowns of some members of a business

You must ask yourself, “Due to a government-ordered suspension, was your business unable to continue activities uninterrupted and in a comparable manner, and did that result in a more than nominal impact on your business operations?” Even if your company has grown during the pandemic, if you experienced a full or partial suspension, there are still expenses that may qualify for the ERC.

My business was deemed an essential business. Even if your business was deemed essential during the eligible timeframe, an impact to or change in business means you still might qualify. If you remained open but your vendors were closed or you could not travel to a client’s job site, you may still qualify.

My business was generating losses. The ERC is a refundable credit, meaning any credit above tax liability is sent as a refund.

My company has grown to more than 500 employees. The employee count restriction is based on full-time equivalent (FTE) employees, which is a more involved calculation than just counting everyone on payroll. Additionally, if you paid any employees to not work, or to work fewer hours for which they were paid, the employee count restriction may not apply to those employees.

We’re here to help

Previously there were a number of limitations based on the number of full-time equivalent employees, receipt of a PPP loan, and other restrictions. However, Congress expanded eligibility and extended the program—both for 2021 and retroactively to 2020 in some cases. The changes to the ERC have created an inconsistent understanding of eligibility. To figure out if you can retroactively claim the credit by filing an amended tax return, contact your trusted tax adviser today.