The Employee Retention Credit (ERC) is a refundable tax credit available to employers of all sizes that were adversely affected by the coronavirus pandemic.
The ERC was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Employers may be able to claim a credit equal to 50% of amounts paid in wages up to $10,000 per employee for the year. Here are the requirements to qualify for this credit.
1. The employer’s business must have been affected by the coronavirus pandemic
This includes a full or partial suspension of operations due to government orders, or at least a 50% reduction in gross receipts compared to the same quarter in 2019. Additionally, employers that receive a loan through the Paycheck Protection Program (PPP) are not eligible for the ERC. Also, the ways to apply for ERC can vary by state. While it is a federal program, state laws may modify some of the qualifications, so be sure to check with your local tax or employment authority.
2. The employer must have paid qualifying wages
The employer must have paid qualifying wages during the year prior to the beginning of the employee’s ERC leave. Qualifying wages include all regular pay, bonuses, commissions, and shift differentials that were paid to the employee in their 12-month period prior to taking leave under ERC. In addition, any vacation or sick pay that was accrued but unused during this same time frame is included as part of qualifying wages.
The employer must also provide documentation that proves these wages were actually paid to the employee in question. Employees who do not meet these criteria will not be eligible for ERC-related benefits and protections.
3. The employer must have experienced a decrease in gross receipts
If your business meets this qualification, you may be eligible for ERC — and could receive up to $5,000 per employee. It’s important to know that this isn’t a one-size-fits-all solution; different businesses will have different needs as they apply for relief funds from the government. That said, employers can use these funds for qualified wages and health care costs — such as group health care benefits like medical or dental insurance. Additionally, you may use these funds to pay for other related overhead expenses like rent or utilities incurred during the covered period.
4. The employer must have provided paid leave benefits
In addition, employers must have employed at least 10 FTEs (full-time equivalents) on average during that period. That means you could have had 20 part-time employees but your total hours worked is equal to 10 full-time employees in order to qualify. It’s important to understand both what qualifies as an FTE employee and how their hours are calculated when determining if you meet the eligibility requirements of ERC. It’s also important to consider your paid leave policies and how they may affect your qualification.
5. The employer must have a valid tax identification number
To qualify for the ERC, a business must have a valid tax identification number. The employer’s tax ID is used to identify the company and file its taxes — it can be found on all paperwork related to the business or obtained from the IRS. A business must include this information when applying for the ERC in order to receive credits. Additionally, the employer must make sure to keep this information up to date — if any changes are made, such as a change in address or business structure, the employer must update this information with the IRS.
6. The employer must comply with other criteria
Businesses must also comply with other criteria to qualify for the ERC. Employers may need to provide proof of employment, such as payroll records when applying for this credit. Documentation verifying the business has been affected by COVID-19 or that it experienced a decrease in gross receipts is also necessary. Additionally, employers must make sure all documentation is submitted accurately and on time in order for applications to be processed quickly — any errors can result in delays or denials of credits.
This includes ensuring employees are properly classified as FTEs, as well as providing accurate information about paid leave benefits.
Understanding the eligibility requirements of the ERC is important for employers to determine if they qualify for this credit and any other related benefits. It’s also key that business owners keep their documentation up-to-date and file their applications accurately, so they can receive financial relief without delay. By taking all these criteria into account, employers can better understand what steps they need to take to apply for and benefit from the ERC.