Who Qualifies for the Employee Retention Tax Credit?

The Covid-19 pandemic has been rough for most people, but small businesses have had a particularly difficult time. Many businesses were forced to shut down or partially shut down to comply with state or federal mandates, which meant lost business. In fact, there’s evidence that small business revenue dropped 52% thanks to Covid-19. 

Lost business revenue hurts the company, yes. But it also hurts the employees. During Covid-19, payrolls dropped 54%, and literally anywhere from 3 to 31 million people were unemployed at any given moment during the pandemic because their place of work had to shut down or shut down partially. These losses made employee retention a pretty difficult goal. 

To combat these losses, the government created the Employee Retention Tax Credit. What is the tax credit? We’ll walk you through the details, who qualifies, and a few other key details you need to know to take advantage of the credit. 

What Is the Employee Retention Tax Credit?

The Employee Retention Tax Credit was introduced as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The goal of the credit was for the government to subsidize small businesses in an effort to encourage the businesses to keep their employees on the payroll during shutdowns. Basically, because small businesses had to comply with pandemic regulations, they lost business and couldn’t pay to keep all of their employees. This tax credit provided small businesses with money to continue to pay their employees despite the lost business. It encouraged employers to keep paying their employees who couldn’t work at all because of the shutdowns. 

When the Employee Retention Tax Credit was introduced, it covered 50% of qualifying employee wages with an upper limit of $10,000 per employee. It was updated in 2021 to allow $10,000 per employee per quarter instead of $10,000 for the entire fiscal year. In November 2021, President Biden removed the Employee Retention Tax Credit officially, and wages after September 30, 2021 don’t qualify. So this tax credit doesn’t technically exist anymore, but it can be claimed retroactively. More on that in a bit. 

What Employers Qualify for the Employee Retention Credit?

So who qualifies for this pretty sweet credit? Is it just any business that suffered in the pandemic? Not exactly. Let’s break it down by the qualification time periods to get a better idea of who qualifies. 

March 13, 2020 Through Dec. 31, 2020

To qualify for the credit (and to qualify retroactively), there are two qualifications. You operated trade or business from March 13, 2020 through Dec. 31, 2020 and: 

1. Were partially or fully suspended due to Covid-19 orders from a government authority
2. Experienced a serious loss in gross receipts—50% less than in 2019 

This applies retroactively too. If you haven’t claimed the credit but met these qualifications in March through December 2020, you can still get the credit. 

Jan. 1, 2021 Through Sept. 30, 2021

To qualify for the credit in 2021, it was almost the same qualifications—with one key difference. You had to operate trade or business and: 

1. Were partially or fully suspended due to Covid-19 orders from a government authority
2. Experienced a serious loss in gross receipts—80% less than in 2019

Basically, in 2021 you had to experience more losses to qualify. If you weren’t in business in 2019, you could use 2020 as your comparison year. Again, if you didn’t apply for the credit then but met the qualifications, you can still get the credit. 

Oct. 1, 2021 Through Dec. 31, 2021

Most businesses didn’t qualify for the tax credit during the end of the year. To qualify you had to be a recovery startup business as defined by the 3134(c)(5) section of tax code. 

What Wages Qualify for the Credit?

There are a few more specifics to qualify for the credit, and it’s all about the wages themselves. This tax credit was designed specifically for businesses to keep non-working employees on the payroll during the pandemic, and it was created for small businesses. That’s important to consider when looking at qualified wages for the employee retention credit. So what are the wages that qualify for the credit? 

• 2020: If you averaged fewer than 100 employees, your wages qualify. If you averaged more than 100 employees, only wages for non-working employees can be claimed. 
• 2021: The threshold increased. You now could only claim ERC for employees not working if you employed an average of more than 500 employees. 

Again, if you didn’t claim the credit in 2020 or 2021, you can still do so using this form: Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. You should file the form for every quarter that you qualify. 

Employee Retention Credit and Paycheck Protection Program

ERC wasn’t the only form of relief around during Covid-19. The Paycheck Protection Program was a loan program to help businesses during the pandemic. Employee Retention Credit can still be used with PPP, but there are some specific regulations: 

• You can’t get ERC relief for wages used for PPP loan forgiveness
• Your gross income had to fall 50% in 2020 from 2019 and 20% from that same quarter in 2021
• You need to file the form 941 X within 3 years of filing or two years of paying the taxes to get credit

If you meet these requirements, you can use ERC and PPP together. 

The Bottom Line

The ERC tax benefits still apply if you meet the requirements from 2020 and 2021, but this credit points at a larger problem in the work environment. Tax credit was used to allow businesses a way to focus on employee retention. We might not be able to rely on government credit all the time for retention, but talent retention is more important than ever. Even now, 20% of employees plan to quit their jobs this year. Losing employees costs you money with the average training costs for large companies costing $22 million a year. On average, companies spent $1,111 per employee in 2020. So, keeping your employees happy and healthy is always important to keeping your business running. 

But retention isn’t something you have to focus on alone. Talk to a Wellbeing Specialist today to get started with great benefits that support employee retention.

References:

• About Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. (November 1, 2016). IRS. Retrieved October 20, 2022 from https://www.irs.gov/forms-pubs/about-form-941-x.
• ATD Releases 2016 State of the Industry Report. (December 8, 2016). Association for Talent Development. Retrieved October 20, 2022 from https://www.td.org/insights/atd-releases-2016-state-of-the-industry-report.
• Arora, Rohit. (August 7, 2020). Study Finds Small Business Revenues Dropped 52% And Payrolls Declined 54% Due To COVID Pandemic. Forbes. Retrieved October 20, 2022 from https://www.forbes.com/sites/rohitarora/2020/08/07/study-finds-small-business-revenues-dropped-52-and-payrolls-declined-54-due-to-covid-pandemic/?sh=1deead3056db.
• Businesses Have Until 2024 to Claim the Employee Retention Tax Credit Retroactively. (August 25, 2022). Paychex. Retrieved October 20, 2022 from https://www.paychex.com/articles/compliance/employee-retention-credit.
• Covid-19 Economic Relief.  (October 18, 2022). U.S. Department of the Treasury. Retrieved October 20, 2022 from https://home.treasury.gov/policy-issues/coronavirus.
• Ellerbeck, Stefan. (June 24, 2022). The Great Resignation Is Not Over: A Fifth of Workers Plan to Quit in 2022. World Economic Forum. Retrieved October 20, 2022 from https://www.weforum.org/agenda/2022/06/the-great-resignation-is-not-over/.
• Employee Retention Credit. (January 10, 2022). Thomson Reuters. Retrieved October 20, 2022 from https://tax.thomsonreuters.com/en/glossary/employee-retention-credit.
• Labor Force Statistics from the Current Population Survey (October 14, 2022). U.S. Bureau of Labor Statistics. Retrieved October 20, 2022 from https://www.bls.gov/cps/effects-of-the-coronavirus-covid-19-pandemic.htm.
• Probasco, Jim. (September 20, 2022). The End of the Employee Retention Credit: How Employers Should Proceed. Investopedia. Retrieved October 20, 2022 from https://www.investopedia.com/what-is-the-employee-retention-credit-and-how-to-get-it-4802575.