When the COVID-19 pandemic struck in 2020, many businesses were disrupted, and some were forced to shut down. To allow employers to maintain their workforce on payroll, Congress introduced the Employee Retention Credit (ERC). Along with the Paycheck Protection Program (PPP), this HR tax credit was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law in March 2020.
As a healthcare provider, you may be wondering what the employee retention credit is, what its eligibility criteria is, and how you can apply for it. Keep reading as this post answers these and other questions.
What Is the ERC?
The employee retention credit (ERC) is a refundable tax credit that was introduced by the federal government to help employers retain their employees amid the disruptions brought by the COVID-19 pandemic.
When it was initially introduced, this HR tax credit was worth 50% of qualified wages paid. However, it was limited to $10,000 per employee for wages paid from March 13 to Dec. 31, 2020.
The Consolidated Appropriations Act (CAA) of 2021 then expanded the ERC to allow qualified employers to claim a credit against 70% of qualified wages paid. The limit was also raised to $10,000 per employee per quarter (applied for the first two quarters of 2021).
The American Rescue Plan (ARP) Act of 2021 extended it further for the last two quarters of 2021. Employers could now claim an HR tax credit of up to 70% for qualified wages paid. The wage limit was $7,000 per employee per quarter. The ERP finally came to an end Oct. 1, 2021, meaning employers could claim the ERP only for wages running up to Sept. 30, 2021. This translated to a total of $21,000 available to be claimed on 2021 tax returns.
What Are Qualified Wages?
Typically, what is counted as a qualified wage depends on the size of your business and how many employees you’ve hired.
- Large companies with more than 100 full-time employees: Qualified wages apply only to the wages paid to employees who were on payroll but were not working due to COVID-19 pandemic-related disruptions.
- Small companies with 100 or fewer full-time employees: Qualified wages refer to all wages paid to employees, whether working or out of work, during the pandemic.
For 2021, the threshold was changed from 100 full-time employees to 500 full-time employees. Also, all wages subject to the Federal Insurance Contributions Act (FICA) qualified for the program.
Can Employers Still Claim the ERC in 2022 and Beyond?
On Nov. 5, 2021, Congress passed the Infrastructure Investment and Jobs Act, bringing an end to the ERC as of Oct. 1, 2021. But if you have not yet made a claim to the ERC, you can still do so against qualified wages you paid to your employees up to Sept. 30, 2021, plus applicable employment taxes. In fact, you have up to three years from the end of the program to claim the ERC.
Who Is Eligible for the ERC?
The ERC is typically available to private-sector employers and tax-exempt organizations that experienced significant losses or had to partially or wholly shut down their operations because of COVID-19 restrictions. Examples of businesses that qualify for the ERC include hospitals, 501(c) organizations, colleges, and universities.
However, eligibility for the ERC also depends on the year you’re applying for. If you want to qualify for 2020, you must have operated a business or trade in 2020 and experienced a disruption of operations due to the COVID-19 pandemic. At the same time, you need to prove that your business experienced a massive decline in sales (below 50% of gross receipts in 2019).
If you want to qualify for 2021, under the CAA, you must prove that your business experienced more than a 20% decline in gross receipts compared to the same time period in 2019. Finally, if you want to qualify for 2021 under the ARP Act, you need to meet the same conditions as in the CAA, but there is one exception: Under the ARP Act, you can qualify for the HR tax credit by comparing your gross receipts to 2020.
How Can One Apply for the ERC?
Employers looking for ERC reimbursement are required to report their total qualified wages and related health insurance costs for the quarter in which the qualified wages apply. This is done on their quarterly tax return — Form 941 for most employers. The HR tax credit is taken against the employer’s portion of the Social Security tax.
Employers with fewer than 500 full-time employees have the option to request an advance payment of the ERC using IRS Form 7200. Those with more than 500 employees cannot get an advance payment for the ERC.
If you did not make your claims for the ERC in 2020 or 2021, you can do so today by filing for a retroactive ERC refund through Form 941-X. This form helps adjust employment taxes filed within two years from the date the taxes were paid or three years from the date of the original return. Depending on when you paid your taxes or filed your original return, you may still be able to claim the ERC through 2024.
Also, you may not have realized that you qualified for the ERC. Some employers, especially those that got a Paycheck Protection Program (PPP) loan in 2020, haven’t made these claims, even if they were eligible.
Make Tax Reporting and Compliance Easy With Empeon
While the employee retention credit offers a great opportunity to reduce your tax burden, navigating the complexities around it isn’t easy. For starters, the ERC rules for 2020 aren’t the same as the ERC rules for 2021 due to the changing laws, which makes it confusing for employers to confirm their eligibility status. On top of that, it can be difficult to ascertain which wages qualify for the HR tax credit and which ones don’t, and filling out the IRS forms can be a hassle for someone who isn’t experienced.
Whether you’re making ERC claims or auditing FMAP compliance, our tax management software allows you to automate the whole process, saving you significant time and energy. And if you’re stuck, you can count on Empeon’s team of specialists to offer the help you need.
Ready to simplify? Book a demo to see how.