If your small business got beat up during the pandemic? And you didn’t get an employee retention credit, or ERC, refund? You should know two things. First, you can still apply for ERC refunds. Second, the final ERC deadline is getting close. April 15, 2025 is the actual date.
But let me dig into the details here so you know whether your firm qualified. And so you know what your firm needs to do to get any refund you missed. One comment here too: The refunds get big fast. If you qualified you’re probably talking tens or even hundreds of thousands of dollars of refunds.
First Some Background About the ERC
The Coronavirus Aid, Relief, and Economic Security Act (Cares Act), enacted in March of 2020, provided several aid packages for employers and employees. The primary goals were to keep businesses afloat and prevent employee furloughs.
Initially, employers had to choose between two programs, the Paycheck Protection Program or Employer Retention Credits. You could not participate in both.
The PPP program generally provided more money to business owners, and, not surprisingly, became the more popular choice.
In December of 2020, however, Congress passed the Consolidated Appropriations Act (CAA). And the CAA allowed businesses to participate in both the PPP and the ERC. Tax practitioners and employers then scrambled to learn about the ERC program in early 2021. And as we all learned, there was serious aid money available to qualified employers.
A final thing to know up front. Employers potentially got ERC funds, or employee retention credit refunds, for wages paid in 2020 and in 2021. But the ERC deadline for refunds based on 2020 wages ended roughly a year ago. What I’m talking about here then are ERC refunds for 2021 wages. But that’s okay. That’s where the big money is.
How to Qualify for ERC?
To qualify for the ERC, businesses must generally meet one of three criteria:
- Significant decline in gross receipts, or
- Full or partial suspension of operations due to a government closure order, or
- Start a new trade or business after February 15, 2020 and before the end of 2021.
From a practitioner’s perspective (and based on experience with many ERC claims), qualifying via a significant decline in gross receipts is usually easiest to substantiate and prove to the IRS. For 2021, an employer needed a decline of more than 20% in gross receipts compared to the same quarter in 2019.
Government shutdown orders, the second way to qualify, introduce nuances that can complicate qualification and implementation. If you’re interested, you can read more about ERC and government shutdown orders here. But you probably want to know that much of the ERC fraud appears to have involved employers alledgedly qualifying based on government orders.
The third way to qualify is to start a new trade or business. To qualify for an ERC refund based on starting a new trade or business, you need to be a small business with average gross receipts over three previous years equal to $1,000,000 or less. This revenue limit looks at the total revenues from all your businesses. And you get the ERC refund based on the wages paid in any of the businesses.
Qualified Wages for ERC
Not all wages qualify for employee retention credits. Some do. Some don’t.
Qualified wages for ERC in 2021 include the following:
- Wages subject to FICA taxes
- Certain health plan expenses allocable to wages
- Employers had to have 500 or fewer employees
Non-Qualified wages for ERC include:
- Wages that were used for PPP
- Greater than 50% owner wages
- Greater than 50% owner family member wages (spouse, children, grandchildren, parents, siblings, in-laws etc.)
How is ERC Calculated
The 2021 ERC formula works differently depending on the credit.
If you qualify based on either a substantial decline in gross receipts or a goverment order, the ERC equals 70% of qualified wages, up to $10,000 per employee per quarter for the first, second and third quarters of 2021.
Example: Suppose in 2021 you have three employees earning $12,000 each quarter throughout the year. Qualified wages in this case equal $10,000 per employee per quarter for quarter 1, quarter 2 and quarter 3. The ERC in this case equals $10,000 × 70% × 3 employees or $21,000 per quarter. So $63,000 in total.
The startup business employee retention credit only applies to the third and fourth quarter of 2021. And the startup business employee retention credit tops out at $50,000 per quarter.
Example: A small construction company enjoys roughly $800,000 of average annual gross receipts. The owner invests in a rental property in late 2020 (so, a new trade or business.) The aggregated business doesn’t qualify for ERC refunds on the basis of either a substantial decline in gross receipts or a government closure order. But it does qualify because a new business started: the rental property. Say the construction company employed ten employees earning $12,000 each in quarter 3 and quarter 4 of 2021. The ERC in this case equals the greater of either $10,000 x 70% x 10 employees, or $70,000 for quarter 3 and $70,000 again for quarter 4., or $50,000 a quarter. In this case, the actual credit equals $50,000 a quarter for the third and fourth quarter, or $100,000 in total
ERC Deadline Depends on Year
The deadline to amend returns and claim the refund depends on the year.
For 2020 ERC claims, the ERC deadline was April 15, 2024. Accordingly, employers cannot still make claims based on 2020 wages.
For 2021 ERC claims, however, the ERC deadline is April 15, 2025. Employers can therefore make claims based on 2021 wages.
Thus, if you operated a small business in 2021, had employees, and never took advantage of the ERC program, reach out to your CPA or tax preparer now. You potentially have large ERC refund claims that will shortly expire.
Also if you started a new trade or business in 2020 or 2021, check in with your CPA or tax advisor. Many small business employers will also qualify for ERC refunds based on this lesser known method.
Tip: If your tax advisor wasn’t able to help you? Or if you’re a tax professional who didn’t gear up to provide this service? We’d be happy to talk about providing you or your client with help. The ERC refund program has restarted. You should have time to apply before the deadline. Contact us here: Nelson CPA inquiry form.
Two Final Words of Caution on ERC Claims
First, carefully vet anyone you engage for ERC work. Unfortunately, the program has been exploited by some (many?) unqualified ERC “mills” that have prepared allegedly fraudulent claims, often leading to significant consequences for businesses. Also if you believe you may have been a victim of ERC fraud, address the issue promptly. (The IRS has a voluntary disclosure program that allows businesses to rectify improper claims and potentially mitigate penalties. You can find more information about this process on the IRS Voluntary Disclosure Program webpage.)
But another caution or suggestion: Don’t not apply for ERC refunds if you legitimately qualify. The ERC has provided life-changing financial relief for many businesses. The window to claim these credits is still open. Therefore don’t miss your chance to file before the April 15, 2025 ERC deadline.
Other Resources
The rules for determining whether you had a substantial decline in gross receipts provide you more flexibility and wiggle room that I describe in the paragraphs above. This blog post gives more detail: 16 Ways of Qualifying for Employee Retention Credits.
More information about the startup business employee retention credit appears here: Startup Business Employee Retention Credit and here: The $100,000 Real Estate Employee Retention Credit Windfall.
Many houses of worship qualified for employee retention credits. If you participate in a faith community where your group was affected by government closure orders, you may want to research this more specialized situation. This blog post provides more details about what went on in Washington state and should be applicable to many other states as well: Washington State Houses of Worship All Qualify for Employee Retention Credits.