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.
What Is The Employee Retention Tax 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.
Are The ERC & The ERTC The Same Thing?
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.
Who Qualifies For The Employee Retention Credit?
To qualify for the ERC, an employer must meet one of the following requirements:
- Experienced a significant decline in gross receipts in 2020 and/or 2021
- Had operations fully or partially suspended in 2020 and/or 2021 as a result of a government mandate
What Qualifies As A Full Or Partial Suspension Of Operations?
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 gross receipts for the suspended portion of the business must make up at least 10% of total gross receipts OR
- The employer hours for the suspended portion of the business must make up at least 10% of total employee service hours
What Does A Significant Decline In Gross Receipts Mean?
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.
Do New Businesses Or Startups Qualify For ERC?
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.
Can Nonprofits Claim The ERC?
Nonprofit organizations, including churches, can claim the ERC if they meet all qualifications set by the IRS.
If My Business Is Permanently Closed, Do I Qualify For ERC?
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 I Sold My Business, Can I Claim 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.
How Are Small & Large Businesses Defined For Claiming ERC?
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.
Can I Receive The ERC If My Business’s Revenue Increased?
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.
What Types Of Businesses Can Receive The Employee Retention Tax Credit?
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 and 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.
Can I Claim The ERC If I Own Multiple Businesses?
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.
Can I Claim The ERC If I'm Self-Employed?
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.
What Are The ERC Eligibility Periods?
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.
Who Can Claim ERC For Q4 In 2021?
Businesses classified as “Recovery Startup Businesses” can claim the ERC for Q4 in 2021. A Recovery Startup Business must meet these requirements:
- Started after February 15, 2020
- Less than $1 million in revenue
What Are Qualified Wages For The ERC?
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:
- Hourly wages
- Vacation pay
- Certain health plan expenses
What Are Gross Receipts When Calculating ERC?
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.
What Employees Can Be Used To Claim The ERC?
If a business meets all requirements for claiming the ERC, it can use its full- or part-time employees that were paid qualified wages to calculate the amount of the tax credit.
Are Any Employees Disqualified From ERC Claims?
Some employees cannot be used when calculating your ERC. This includes:
- Yourself, if you are self-employed and have no additional employees
- Relatives of majority owners
- Employees of government entities
- Employees of any employer that did not experience a significant decline in gross receipts or was subject to a full or partial government shutdown
What Is An FTE?
An FTE is a full-time equivalent employee. The number of FTEs in your business helps determine the amount of your ERC.
How Do I Calculate FTE For 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.
What Records Do I Need To Calculate ERC?
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:
- Basic information about your business
- Quarterly tax returns from 2020 and 2021
- Payroll records
- Paycheck Protection Program & loan forgiveness documents
How Much Can I Receive From The ERC?
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.
How Do You Calculate The Employee Retention Tax Credit?
There are five steps to calculating the ERC. Those steps are:
- Determining if you’re eligible for the ERC
- Calculating your FTE
- Gathering documentation required to fill out your tax forms
- Calculating qualified wages
- Filling out and submitting your amended tax return to the IRS
Our guide to how to calculate the ERC offers additional details on calculating the amount of your tax credit accurately.
Can I Still Apply For The ERC?
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.
What Is The Deadline For Claiming The ERC?
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.
How Do I Apply For The ERC?
If you didn’t claim the ERC on your original quarterly tax return, you can retroactively claim the credit by filing an amended quarterly tax return and submitting it to the IRS.
What Forms Do I Use To Calculate & Apply For ERC?
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.
How Do I Fill Out The Form To Claim The ERC?
Filling out Form 941-X to claim the ERC can be intimidating. You will need to include the following:
- Personal information, including your Employer Identification Number
- Information about the return that is being corrected
- Calculations to determine the amount of your refund
- Your signature and/or the signature of the preparer of the form
Though the process is a little overwhelming, we’ve created a step-by-step guide on how to fill out Form 941-X.
Do I Need To Send Documentation With 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.
Can I E-File My Amended Tax Return To Claim The ERC?
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.
Where Do I Send My Amended Tax Return To Receive My ERC Refund?
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.
Do You Have To Repay The Employee Retention Credit?
The ERC is a fully refundable tax credit. It is not a loan and does not have to be repaid.
How Will I Receive An ERC Refund?
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.
How Long Will It Take To Receive An ERC Refund?
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.
How Do I Check The Status Of My ERC Refund?
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.
Are There Limitations To How The ERC Refund Is Spent?
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.
Are Third-Party ERC Companies Legit?
CPAs, tax services, and even third-party 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.
How Do I Avoid ERC Scams?
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 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:
- Demand for a large upfront payment
- No company phone number or limited ways to contact the business
- A lack of online reviews
- Companies that quote you a much higher refund than you’re entitled to receive
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.
How Much Does It Cost To Hire An ERC Company To Claim My Refund?
The cost of hiring an ERC company to help you claim your ERC refund varies widely, so make sure to shop around and compare rates. Typically, these companies take a small percentage 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 I Received A PPP Loan, Can I Apply For ERC?
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 My PPP Loan Was Forgiven, Does It Affect ERC?
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.
Does ERC Affect The R&D Tax Credit?
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.
Is The IRS Auditing ERC Claims?
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.
What Do I Do If My ERC Claim Is Audited?
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.
How Long Does The IRS Have To Audit ERC Claims?
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.
What Happens If I Made An Error When Claiming The ERC?
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.
Is The ERC Refund Considered Taxable Income?
The ERC is not considered taxable income.
How Do I Record The ERC In My Accounting Software?
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.
Who Can I Go To For Help In Calculating & Claiming My ERC Refund?
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.
When Should I Hire A Professional To Claim My ERC?
Consider hiring a professional to claim your ERC if you:
- Are unsure if you qualify for the ERC
- Are having trouble calculating the ERC or filling out the proper forms
- Have a complicated tax situation
- Don’t have the time to calculate and claim the ERC
- Want protection if the IRS audits 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.
I Don’t Qualify For ERC. What Tax Credits Are Available To Me?
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.