Business taxes can get complex and confusing. To help, we've compiled this ERC FAQ to help you understand the employee retention credit.
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On 1/10/24, IRS Commissioner Daniel Werfel announced that the IRS is continuing to improve and automate ERC review procedures and will begin processing new ERC claims in the spring following the moratorium implemented in September. Existing claims are still being processed and eligible businesses can still submit an ERC claim through reputable ERC companies to be processed when the moratorium ends. Visit our full breakdown of the ERC pause for the latest information.
If you are confused about what the employee retention credit (ERC) is, you’re not alone. That’s why we’ve created this employee retention credit FAQ guide to answer all of your questions.
If you’re a small business owner seeking guidance on everything from qualifying for the ERC to filling out tax forms and waiting for your refund, you’re in the right place. Keep reading to find the answer to your ERC questions.
If you have ERC questions, we’ve got your answers with this employee retention tax credit FAQ. Here are the most frequently asked questions about the employee retention credit.
The employee retention credit (ERC) is a refundable employer tax credit that was put into law through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This credit offsets employment taxes paid by an employer to offer relief from the coronavirus pandemic. The ERC worked two-fold by offsetting employers’ costs while also preserving jobs.
Yes, the ERC and the ERTC are the same. ERC stands for Employee Retention Credit, while ERTC stands for Employee Retention Tax Credit. These acronyms are used interchangeably to describe the same employer tax credit.
To qualify for the ERC, an employer must meet one of the following requirements:
To meet the requirement of a full or partial suspension of operations for the purpose of claiming the ERC, a business must have limited commerce, travel, or group meetings due to COVID-19 under an order, proclamation, or decree of a federal, state, or local government.
In addition, a business must show that the business was more than nominally impacted as a result of the government order. This means that one of the following requirements must be met:
The meaning of a significant decline in gross receipts differs between 2020 and 2021.
In 2020, a significant decline is defined as a 50% decrease compared to the same calendar quarter in 2019.
In 2021, a significant decline is defined as a 20% decrease compared to the same calendar quarter in 2019.
New businesses and startups that began operations after February 15, 2020, may qualify for the ERC if they had at least one qualifying employee and had less than $1 million in revenue.
Nonprofit organizations, including churches, can claim the ERC if they meet all qualifications set by the IRS.
If your business was in operation during Q3 or Q4 of 2020 or during the first three quarters of 2021, you can claim the ERC for any period for which you were eligible. If your business was closed and you did not pay qualified wages, you are not eligible to claim the ERC.
If you were the owner of your business during any of the qualifying periods for claiming ERC, you are still eligible to retroactively claim your refund if you meet all requirements set by the IRS. You would not be able to claim ERC for any period during which the business was under new ownership.
It is important to understand the definition of small and large businesses for claiming the ERC to calculate the amount of your tax credit accurately.
In 2020, a small business, for the purposes of the ERC, is defined as a business with 100 or fewer full-time employees. In 2021, a small business was defined as a business with 500 or fewer full-time employees.
Small businesses are eligible to claim all employee wages. Large businesses are only eligible to claim wages paid to employees that did not provide services.
If your business’s revenue increased in 2020 and/or 2021, you might still qualify for the ERC. In order to qualify with higher revenue, your business must have undergone a full or partial suspension as a result of a government mandate.
Many different types of businesses can receive the ERC provided they meet the requirements of the IRS. This includes for-profit businesses, nonprofit organizations, and churches/religious organizations. Businesses that fail to meet the requirements set by the IRS, government entities, and self-employed individuals with no employees do not qualify for the ERC.
It is possible to claim the ERC if you own multiple businesses. However, if multiple businesses have one owner, these businesses are viewed as a single employer. This means that gross receipts, the number of full-time employees, and the calculation of qualified wages are aggregated across all businesses.
If you are self-employed, you may be eligible to claim the ERC. If you are the only employee in your business, you do not qualify for ERC. However, if you have other employees, you may be eligible if you meet all requirements set by the IRS.
If you are an employee of a small business, you are not eligible to receive ERC. The ERC is a refundable tax credit only available to business owners that kept employees on payroll during the COVID-19 pandemic.
The ERC can be claimed for qualified wages paid from March 13 through December 31 during 2020. For 2021, businesses can claim the ERC for qualified wages paid from January 1 through September 30. Certain businesses may be eligible to claim the ERC for qualified wages paid from October 1, 2021, through December 31, 2021.
Businesses classified as “Recovery Startup Businesses” can claim the ERC for Q4 in 2021. A Recovery Startup Business must meet these requirements:
Qualified wages used for calculating the ERC are wages paid that are subject to FICA taxes. This includes but is not limited to the following:
Gross receipts are defined as revenue from any source. This includes but is not limited to sales of products or services, rent, commissions, royalties, allowances, interest, and dividends.
If a business meets all requirements for the ERC, it can use its full- or part-time employees that were paid qualified wages to calculate the amount of the tax credit.
Some employees cannot be used when calculating your ERC. This includes:
An FTE is a full-time equivalent employee. The number of FTEs in your business helps determine the amount of your ERC.
Calculating FTE is tricky for some business owners, as it doesn’t just count full-time employees. A business can have multiple part-time employees that are included in their FTE calculations.
Calculating FTE shows the number of full-time hours worked among all employees. You can calculate FTE with the following equation:
FTE = Number Of Employee Hours / 30
Using this equation, an employee that works 30 hours per week counts as one FTE. Using the same equation, an employee that works 15 hours per week is counted as 0.5 FTE.
When calculating FTE for ERC, you don’t have to perform a separate calculation for each employee. Instead, you can add up the hours worked by all full- and part-time employees, then divide this number by 30.
It is important to keep excellent records to calculate ERC, as well as to verify your calculations at a later time if requested by the IRS. Before calculating your ERC, you will need to gather the following:
For tax year 2020, you can receive up to 50% of qualified wages per employee, with a maximum of $5,000 per employee for the entire year.
For tax year 2021, you can receive up to 70% of qualified wages per employee per quarter, with a maximum of $21,000 per employee for the year. Most businesses will only be eligible to claim qualified wages for Q1 through Q3.
However, Recovery Startup Businesses may also claim up to 70% of qualified wages per employee for Q4 of 2021.
There are five steps to calculating the ERC. Those steps are:
Our guide to how to calculate the ERC offers additional details on calculating the amount of your tax credit accurately.
If you did not claim the ERC on your 2020 or 2021 tax returns, you can claim the credits retroactively for any period for which you qualify.
The deadline for claiming the ERC for eligible quarters in 2020 is April 15, 2024. The deadline for claiming the ERC for eligible quarters in 2021 is April 15, 2025.
If you didn’t claim the ERC on your original quarterly tax return, you can retroactively claim the ERC credit by filing an amended quarterly tax return and submitting it to the IRS.
If you are retroactively claiming the ERC refund, you will use IRS Form 941-X, titled “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.” This form will need to be completed and submitted by mail to the IRS. A separate 941-X is required for each quarter for which you’re claiming the credit.
Filling out Form 941-X to claim the ERC can be intimidating. You will need to include the following:
Though the process is a little overwhelming, we’ve created a step-by-step guide on how to fill out Form 941-X.
You are not required to submit additional documentation when mailing in your 941-X. However, you do want to hold onto all records and documentation that prove you qualify for the amount you claimed in the event of an IRS audit.
No. Unfortunately, you can’t e-File your amended tax return to claim the ERC. You will be required to print each 941-X and mail it to the IRS.
The address of where you mail your IRS form depends on the state in which you are located. Additionally, taxpayers with no legal residence or principal place of business in any state, businesses that use private delivery services, and certain exempt organizations have different addresses that they will use when mailing their amended returns.
Check out the IRS website to find out where to mail Form 941-X for the ERC.
The ERC is a fully refundable tax credit. It is not a loan and does not have to be repaid.
If you proactively claim the ERC refund by filing an amended tax return, you will receive a check from the IRS in the mail. This check will be sent to the address that is on file with the IRS.
Due to a backlog of ERC claims, the IRS is experiencing significant delays in processing claims and issuing refunds. While some businesses may only have to wait a few months, some taxpayers have reported timelines as long as 10 to 12 months or even longer for receiving their ERC refunds.
If you don’t want to wait this long to get your refund, you can get an advance of your ERC funds with an ERC loan. Have a look at the best ERC loans to find a lender that can get you your ERC funds in weeks, not months.
To check your ERC refund status, you can contact the IRS directly by phone at 1-877-777-4778. You should be prepared to provide the taxpayer’s name, federal identification number, and other information. It is important to note that you may face long hold times, and there is no guarantee that you will receive any information on the status of your refund.
The ERC is a fully refundable tax credit. It is not a loan or other form of business funding that has limitations on how it is spent. Therefore, you can spend your ERC refund however you choose.
An ERC advance, also known as a bridge loan or ERC loan, is an advance on ERC funds. For a fee, some third-party ERC companies will provide an advance of ERC funds within weeks (or in some cases, just a few days). This allows small business owners to have access to their funds immediately as opposed to waiting for a year or longer to receive their refunds from the IRS. While it does come at a cost, this is a great option for businesses that need immediate funding for working capital, inventory, supplies, equipment, or other necessary purchases.
CPAs, tax services, and even third-party ERC companies specializing in ERC claims can help you receive your ERC refund. However, it is important to note that not all ERC companies are legitimate. In fact, the IRS has issued warnings about ERC scams that are on the rise. Make sure to research and vet any individual or company properly that you are considering hiring to claim your ERC refund.
The first step to avoiding ERC scams is to properly research any company or individual that you plan to work with. You can also start by checking out our top picks for best ERC companies, all of which are legitimate companies that will help you claim the ERC.
When choosing an ERC company, keep an eye out for red flags, such as:
Getting caught up in a scam can be costly and damaging to your business. Before you hire someone to claim your refund, learn how to avoid common ERC scams.
ERC fees vary widely, so make sure to shop around and compare rates. Typically, these companies take a percentage of around 10% to 25% of your refund when it is received. Be wary of companies that demand large payments upfront, as this is typically a sign of an ERC scam.
If you received a Paycheck Protection Program loan, you might qualify for ERC. However, it is important to note that you can’t use wages to calculate ERC that was used to qualify for PPP loan forgiveness. This is known as “double dipping” and is not permitted by the IRS.
If your PPP loan was forgiven, it may affect the amount of your ERC. Any wages used to calculate PPP loan forgiveness can not be used to calculate the ERC.
Here’s a quick example to break it down: Your business paid $20,000 in wages. When applying for PPP loan forgiveness, $10,000 of these wages were used to qualify. This leaves your business with $10,000 in wages that can be used to calculate your ERC.
It is possible that ERC can affect the research and development tax credit and vice versa. Any wages used to calculate and claim the ERC credit can’t be used for the R&D tax credit. Likewise, any wages paid for research and development that were used to claim the R&D tax credit can’t also be used for ERC.
Yes, as with any other tax return, the IRS can audit ERC claims. Some businesses have reported that they have already been audited. Businesses with large ERC claims are more likely to be audited, but any taxpayer can be audited within the IRS’ statute of limitations.
The first thing to remember if your ERC claim is audited is to remain calm. Being audited doesn’t mean you did anything wrong, and if you kept your records and calculated your ERC correctly, you have nothing to worry about.
It is very important to keep in contact with the IRS and respond in a timely manner. Do not avoid the IRS, and make sure to read over any notices carefully and follow all instructions. Don’t be afraid to ask the IRS any questions throughout the process. It may also be beneficial to seek the advice of a professional (such as a CPA or attorney) if you’re unsure about the next steps.
Typically, the statute of limitations for IRS audits is three years. However, under the American Rescue Plan of 2021, Congress extended this timeline to five years for ERC claims filed in Q3 and Q4 of 2021.
If you made an error when claiming the ERC, you will need to file an amended return for each period where an error was made. An amended return should be filed whether you originally claimed the ERC or you already filed an amended return. If you received an ERC refund that was more than what you were supposed to receive, you will be required to pay back any overages, as well as any interest and penalties that the IRS imposes.
The ERC is not considered taxable income. Read our post full post on how ERC affects taxes.
How you record the ERC in your accounting software depends upon whether you’ve already received the tax credit or if you retroactively filed and are awaiting your refund. Steps include recording your tax payment in the general ledger and creating an accounting entry for anticipated refunds, followed by another entry after you’ve received the refund. Don’t hesitate to contact your accountant if you have questions about recording your ERC.
If you need help calculating and claiming the ERC refund, you have several options. You can consult with a CPA, tax service, or even a third-party company that specialized in ERC refunds. No matter which option you choose, make sure to do your research to find a cost-effective and reputable individual or business to help you through the process.
Consider hiring a professional to claim your ERC if you:
Generally, if you’re feeling uncomfortable during any step of the process, it’s a good idea to at least consult with a pro before moving forward.
If you don’t qualify for the ERC, don’t worry — there are plenty of other tax credits that you can use to reduce your tax liability. If your business has hired employees that typically struggle to get or maintain employment, you may qualify for the Work Opportunity Tax Credit. If your business engages in qualified research and development, you may be eligible for the R&D tax credit.
And don’t forget about tax write-offs and deductions that can save your business money when tax season rolls around.
Determining eligibility, calculating, and claiming the ERC can be overwhelming, but it’s worth the time and effort. Small business owners, just like you, are putting thousands of dollars back into their pockets by claiming this tax credit. And if the task seems too burdensome, there are plenty of tax pros and financial experts ready to help you claim the money you’re owed.
Hopefully, we answered all of your ERC questions above, but if you still need help with your ERC credit, consider reaching out to a designated ERC tax credit company to help you file for and claim your ERC credit.
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