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Assessing Your Eligibility for Employee Retention Credit

by Madhuri Boinwad
Assessing Your Eligibility for Employee Retention Credit

We live in a world that constantly puts us to the test in one way or another. It could be anything like your business tanking due to poor revenue generation or loans you are unable to pay back. Perhaps recent developments like the pandemic are forcing you to let your employees go because of your inability to pay them.

Businesses and Employee Retention

Letting your employees go is one of the toughest decisions a business has to make to survive. For companies that consider their employees an integral part of their operations, it can be an unbearable idea. 

It isn’t surprising that some business owners would rather drive their business into the ground than let their employees go. If this is the dilemma you’re facing, take heart. Your business doesn’t have to take the brunt alone. Through the IRS, you can obtain employee retention credit for your business. Employee Retention Credit (ERC) can give your company the help it requires to survive the crisis. 

What is ERC?

Legislated by the United States, ERC comes to the rescue of business owners who want to retain full-time employees during the economic downturn caused by the global pandemic. These businesses can claim tax credits and be reimbursed on qualified wages and even certain healthcare benefits awarded to employees.

This allows and encourages them to retain employees that they otherwise might be inclined to let go of.

Employee Retention Credit has been around for quite some time now. However, its initially restrictive requirements led it to take a backseat during these times when such policies should have been encouraged.

The CARES Act

ERC is part of the Coronavirus Aid, Relief, and Economic Security or CARES Act that was introduced by the US government to soften the economic blow caused by the global pandemic. 

For businesses that qualify, a 50% tax credit of up to $10,000 a year per employee can be claimed. The timeline for the said act covers wages and benefits paid out between March 13 and December 31, 2020. However, there are other stimulus packages that your business may qualify for as part of the CARES Act and ERC.

Consolidated Appropriations Act (CAA) 2021

For businesses that qualify for CAA, a 70% refundable tax credit of up to $10,000 per quarter can be claimed per employee retained. This is applicable for the first two quarters of 2021.

American Rescue Plan Act (ARPA) 2021

The American Rescue Plan Act provides troubled businesses with refundable tax credits similar to the CAA: 70% of qualified wages up to $10,000 per quarter. 

For businesses that started after February 15 and were badly hit by government ordinances, they may be eligible for a $50,000 tax credit per quarter.

Who Is Eligible To Apply For the ERC?

Businesses that took the brunt of the pandemic in the form of a full or partial shutdown because of a government order can apply for ERC. 

This pandemic has seen several businesses fail due to government-imposed limits on traveling, shipping, and other commercial activities. In situations like this, the government through the ERC will provide a refundable tax credit of up to $5,000 per employee retained. 

Any business that had to shut down partially or totally following government orders is eligible to apply for ERC. Businesses that had to cut down on crucial business hours are also included. The ERC Act works on a quarterly basis. Of course, returns will only be based on the length of time a business was shut down during a certain quarter.

Essential services and e-commerce platforms are exempt from availing the benefits of ERC unless they see a significant decline in gross receipts.

What’s the Difference Between the Original ERC Act and the Revised Version?

Initially, only businesses with 100 or fewer employees were allowed to apply for ERC. These businesses should have been impacted by government ordained shutdowns or suffered a gross downgrade of 50% or more of their annual revenues. 

Previously, the ERC set criteria that kept businesses from availing of the benefits it offers. For example, it was not available for businesses that took out a Paycheck Protection Program (PPP) loan or its corresponding PPP loan forgiveness.

The good news is, the rules for ERC eligibility became more inclusive when the CAA and the American Rescue Plan were passed. The revised version has expanded to include businesses with 500 or fewer fixed-term employees instead of just 100. This has significantly widened the scope of eligibility for obtaining refundable ERC tax credits.

The Takeaway: Expanded ERC Can Help Your Business Stay Afloat

If you’re a business affected by the pandemic, you may qualify for refundable tax credits for each employee you kept on your payroll. The amount is significant and can help your business survive these economically tough times. 

With the changes made to the initial provisions of ERC, even recipients of PPP loans can now apply for the package. The stimulus amount has been upgraded while its benefits qualify more businesses to avail of it in light of the challenging business climate.

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