How to Determine Eligibility & Claim Your Employee Retention Credit
June 9, 2022 •The Citizens State Bank Team
The COVID-19 pandemic created major challenges for the U.S. economy, especially for small businesses in Central Indiana. Fortunately, the Coronavirus Aid, Relief, and Economic Security (CARES) Act established government aid programs to help businesses recover. One of those programs is the Employee Retention Credit (ERC).
Many business owners aren’t aware that it’s possible to still claim this generous tax credit, or believe that if they applied for the Paycheck Protection Program (PPP), a small business loan funded by the government, they cannot also apply for the ERC. This article will help you find information on the ERC, determine eligibility, and understand the next steps to claim it.
What Is the Employee Retention Credit?
The Employee Retention Credit incentivized businesses to retain employees during the pandemic by offering up to $26,000 per employee in tax credit for 2020 and quarters one through three of 2021. The amount of credit eligible businesses may receive is based on the wages paid to employees during that time frame. Eligible companies may claim the ERC by amended quarterly IRS payroll tax returns—meaning it’s still possible to receive this credit for your small business.
Determining Eligibility for the Employee Retention Credit
It’s estimated that more than 80% of businesses that apply qualify to receive the ERC, so it’s certainly worth the time to determine eligibility.
Businesses that may be eligible include retail stores, restaurants, schools, hospitals, non-profit organizations, museums, and even churches. Companies that are not eligible are local, state, and federal government entities, and self-employed individuals with no full-time employees on their payroll.
Eligibility is determined by whether or not your business experienced a decline in gross receipts to comparable quarters in 2019 (by >50% for 2020 or >20% for 2021). Additionally, they consider if your business was forced to limit its operations, close, or restrict capacity due to government restrictions.
Here are several conditions you may need to meet in order to qualify:
- Decrease in hours of operation
- Disruption to supply chain
- Inability to attend in-person trade shows
- Impacted due to staff working from home
If you think your business is disqualified because you received a PPP loan, that’s no longer the case. Initially, the PPP prohibited businesses from participating in PPP and claiming the ERC. However, The Consolidated Appropriation Act (CAA), signed on December 27, 2021, extended and expanded eligibility to include a provision allowing 2020 PPP borrowers to also apply for the ERC.
How Do I Apply for the Employee Retention Credit?
First, determine which wages qualify for Employee Retention Credit. The IRS will need to know the average number of full-time employees in your business before the pandemic (2019). If you had 100 or fewer full-time employees in 2019, the IRS considers your business small.
However, in 2021, your business is deemed small if it has 500 or fewer average full-time employees. For the Employee Retention Credit, a full-time employee must have worked 30 hours per week or 130 hours per month for a calendar month.
Next, calculate your qualifying wages. Qualifying wages start on March 13, 2020, including paid time off, contributions to furloughed employees, and most employer healthcare contributions. You are required to justify only the wages up to the per-employee maximum for 2020 (50% of qualifying wages, up to a maximum credit of $5,000 per employee ) and each of the first three quarters in 2021 (70% of qualifying wages up to a maximum credit of $7,000 per employee, per quarter).
Lastly, claim the Employee Retention Credit on your business's amended quarterly payroll tax returns. While you can receive money through both the PPP and ERC, it’s important to pay close attention to where they come from so that they do not overlap. If you paid wages through a PPP loan, you cannot use the same wages to apply for an ERC as well. However, you can use wages that exceed the amount of the loan. Also, keep in mind that if you have a PPP loan, it may be more beneficial to put your wages toward the ERC instead of applying for PPP loan forgiveness, if you have not already done so. It’s worth calculating which option could be best for your company to ensure your business gets the most out of the relief funds.
To help determine eligibility, calculate qualifying wages, and file for the Employee Retention Credit, be sure to have all necessary documentation on hand. This includes, but is not limited to the following:
- PPP documentation and wages paid using the PPP loan
- Healthcare contributions
- Full-time employees on payroll and their qualified wages
- Completed tax returns for 2019, 2020, and 2021
- Quarterly revenue reports for 2019, 2020, and 2021
When Is the Deadline to Apply?
Although The Employee Retention Credit officially ended on October 1, 2021, you can claim it in 2022. Small business owners may make claims retroactively from March 13, 2020 to September 30, 2021. The good news is you have three years to amend your tax return from the date of filing to claim your ERC. However, it helps to have some sense of urgency, considering the funds will eventually run out (as they did in the case of PPP loans); it’s best to act now.
Unlock the Benefit of the Employee Retention Credit
The Employee Retention Credit can provide your business with a significant amount of money, so don’t let it sit on the table.
At Citizens State Bank, we offer many services to small businesses like yours in Indiana, including online resources for business loans, cash flow, and assistance with ERC.
We understand that this process is complex, which is why we partner with our friends over at Innovation Refunds to help you maximize this opportunity. They have a team of CPAs, attorneys, and other experts who specialize in applying for the Employee Retention Credit.
We want to help you claim the money your business is entitled to receive.
With nearly 80% of businesses meeting qualifying criteria, now is the perfect time to request your refund estimate
The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent the views of Citizens State Bank and its affiliates, and Citizens State Bank is not responsible for and does not verify the accuracy of any information contained in this article or items hyperlinked within. This is for informational purposes and is no way intended to provide legal advice.