Top Misconceptions About The Employee Retention Credit

The Employee Retention Credit (ERC) was introduced in 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and has been one of the most popular and confusing tax credits that has evolved as a result of the pandemic. 

The Employee Retention Tax Credit has been retroactively updated and amended numerous times since the original ERC legislation. In fact, there have been so many changes to the ERC legislation and so many gray areas, it’s difficult for employers to know whether they are eligible for the credit.

There have been so many misconceptions about the ERC, that many employers believe they don’t qualify, when in fact, they do. 

This article covers what the credit is, common misconceptions about the credit, and what the requirements entail so you can be up-to-date on the new employee retention credit guidelines.

What is the employee retention credit?

The ERC is a refundable employment tax credit that was designed to provide temporary relief during the pandemic by helping businesses keep employees on their payroll. It’s a payroll tax credit that is claimed on Form 941.

The ERC was introduced in 2020 as part of the CARES Act and expanded in 2021 by the American Rescue Plan Act to help businesses maintain their footing during two years of uncertainty amidst the pandemic.

What are the ERC requirements?

ERC requirements differ depending on the year.

During 2020 it included any tax-exempt organization or private-sector employer carrying on a business or trade that experienced one of the following:

1. Partially or fully suspended operations during any quarter due to restrictions from a governmental authority due to the pandemic; or
2. A downward spiral in gross receipts during the quarter, i.e. gross receipts falling below 50% of the comparable quarter in 2019. If the gross receipts went above 80% of a comparable 2019 quarter, they no longer qualified after the end of that quarter.

During 2021 more than 10% of business operations must have been suspended to qualify. This means that either the gross receipts were not less than 10% or the hours worked by an employee was not less than 10% of the total number of hours worked by all employees in the business.

What are common misconceptions about the ERC?

1. I don’t qualify because my business received a Paycheck Protection Program (PPP) Loan.

Initially, this assumption was correct. However, the Relief Act changed this rule and the Consolidated Appropriations Act of 2021 removed the limitation. This allowed eligible employers to claim the ERC on any wages that were not counted as payroll costs when obtaining the PPP loan forgiveness. Qualified wages can count toward the eligibility of either program, but not both. However, businesses can use both programs.

2. My business didn’t have a drop in gross receipts of 50% or more so I am not eligible for ERC.

The Consolidated Appropriations Act dropped the qualification of 50% down to 20% for the first three quarters in 2021.

3. My business didn’t shut down during the pandemic, so I’m not eligible for ERC.

Your business can still qualify for ERC if your business experienced a significant deduction in revenue, you didn’t have full access to equipment, you had limited capacity and hours, you had to partially shutdown, or there was a disruption to the business operations, vendor, or supply chain.

4. I must have fewer than 500 employees to be eligible.

The restriction on the business employee count is not based on every employee in the workplace. It is only based on the number of full-time employees.

5. My business was deemed an essential business so I do not qualify.

A business still qualifies for ERC if there was a downward spiral of revenue, a change in operations, or experienced an impact.

6. I don’t qualify because during the pandemic my business had an increase in sales.

Even though the business had an increase in sales, you may still qualify for ERC. If the business was impacted by a partial or full suspension of operations that was the result of a governmental restriction, you may still be eligible for the ERC.

7. I’m a not-for-profit, therefore, I can’t claim the ERC.

There are certain not-for-profit organizations that can claim the ERC. These include organizations such as non-profit churches, hospitals, museums, and more.

8. In the first quarter of 2021, my business’s sales rebounded so I didn't qualify.

The Consolidated Appropriations Act gives the business the freedom to choose its eligibility based on either a suspension in operations or lost revenue in the quarters of 2020.

What are the eligible wages for employee retention credit?

When it was initially introduced, the tax credit accounted for 50% of qualified wages and was limited to $10,000 per employee per year with a maximum credit of $5,000 paid from March 13, 2020 to December 31, 2021.

The credit has been updated. It is now 70% of qualified wages for 2021 with a per employee limit of $10,000 per quarter.

There are different rules for employers with under 100 employees and 500 employees for portions of 2020 and 2021.

Do I need to know how to retroactively claim employee retention credit?

Employers can retroactively claim the employee retention credit. If an employer didn’t claim the ERC for 2020 or 2021 on a quarterly payroll tax return, then you can file an amended return for each quarter that you missed. To file an amended return, you can use either Form 944-X or Form 943-X to claim the credits.

Ensure your business is tax-advantaged and see if you are eligible for the ERC based on the new employee retention credit guidelines. See how Corvee can help!