What Is The Employee Retention Credit?

The Employee Retention Credit (ERC) is a refundable tax credit introduced by the U.S. government as part of the CARES Act in March 2020. Initially, the ERC was designed to encourage businesses to keep their employees on the payroll during the COVID-19 pandemic by providing a credit for wages paid to eligible employees.  However, it is also available retroactively to those businesses which did so in 2020-21.

The credit is available to eligible employers who meet certain criteria, including experiencing a significant decline in gross receipts or being fully or partially suspended due to a government order related to COVID-19.

The ERC was initially available for wages paid between March 13, 2020, and December 31, 2020, but has been extended multiple times and is now available for wages paid between March 13, 2020, and December 31, 2021.

How To Claim The Employee Retention Credit Retroactively

While the ERC is available retroactively, the IRS has not made it easy to claim it.  There is no single form and no process for simply providing documentation to support your claim.  Here are some factors to consider:

1.  To retroactively claim the ERC, businesses must file an amended Form 941-X for each quarter that applies. The Form 941-X is used to correct errors on previously filed employment tax returns, such as Form 941. It allows businesses to claim the ERC retroactively by providing updated information on wages paid to eligible employees.  A separate 941-X is required for each quarter, and even though it is filed retroactively, it still must break out the non-refundable and refundable portions of the ERC.
2. You Need To Know Your PPP Loan Information.  Suppose a business has applied for a Paycheck Protection Program (PPP) loan. In that case, it’s important for the business to keep its loan information available when determining its retroactive Employee Retention Credit (ERC) amount. This is because the ERC and PPP programs have some overlapping rules, and the PPP loan forgiveness period impacts the eligibility for ERC. Most importantly, the ERC cannot be claimed on wages already forgiven under the PPP loan program.
3. Additionally, any expenses reimbursed by the Family First Coronavirus Response Act (FFCRA) cannot be used towards PPP loan forgiveness or the ERC. Therefore, it is important to carefully track and separate any expenses reimbursed under the FFCRA to ensure they are not included in the ERC calculation.  Furthermore, a business may have claimed wages towards other tax credits like the Work Opportunity Tax Credit or Research and Development Tax Credits. In that case, it can complicate the allocation of expenses and eligibility for the ERC.
4. Do not over-qualify!  There are some ERC consultants out there who promise $26,000 per employee.  That is wildly optimistic — you only get that amount if you max out every quarter in 2020-21.  The qualification rules are for real and over-qualifying can lead to significant risk of audit or even fraud.  Do not trust consultants who promise you the moon.  Businesses must have on hand payroll data and documentation to support their eligibility for the ERC, such as quarterly wage and tax statements (Form 941) and documentation of any full or partial suspension of operations.

In conclusion, the Employee Retention Credit (ERC) is a valuable tax credit that many businesses may have missed out on in the past but can now retroactively claim for the 2020-2021 tax years. This credit can provide significant financial relief to eligible businesses that experienced a decline in revenue or had to close due to COVID-19.

However, claiming the ERC retroactively is a complex process that requires careful consideration of various factors, including PPP loan forgiveness, the allocation of expenses, and eligibility for other tax credits.

This, of course, is why Spider ERC exists: to help you navigate the web of regulations and rules so that you can obtain the credit you deserve.