How the ERC Works

The employee retention credit is a refundable tax credit from the IRS of up to $26,000 per employee, based on qualifying payroll that was paid to W2 employees during 2020 and 2021.

Any small business that saw a quarter-over-quarter decrease from 2019 to 2020 or 2021 (using various calculations I won’t delve into here) may qualify. Additionally, any business that was partially or fully shut down for any period due to a government mandate may qualify. This means almost every physical location small business will qualify. 

- A full or partial shutdown of operations because of a government order limiting commerce due to COVID-19 during 2020 or 2021.

- Or a gross receipts decline of more than 50 percent during a 2020 or 2021 calendar quarter, when compared to the same quarter in the prior year.

- Or a “recovery startup” business that was launched after Feb. 15, 2020, for which the average annual gross receipts do not exceed $1 million, subject to a quarterly ERC cap of $50,000.

When ERC was originally rolled out, a business had to choose between the PPP and the ERC. They couldn’t do both. Because the early version of the ERC only provided a credit for a few months of payroll, the PPP was much better. Thus, businesses did not file ERC. The requirements have changed several times over the last twelve months. Businesses are now allowed to file ERC, even if they received PPP funds. Also, the amount of payroll that can qualify has expanded dramatically, making the ERC refundable credit a huge opportunity for most small businesses.

Generally, a business would file for the ERC on IRS Form 941. Since most businesses have already filed this form for 2020 and 2021, a 941-X form must be filed to revise the original 941. This refiling also requires some complex calculations to determine the amount of the credit and some detailed documentation. Both these requirements are handled by a specialized firm that does this work on behalf of the business owner.

The maximum credit is $26,000 per employee, but very few employers will qualify for this amount. This is because any PPP funds used for wages must be removed from the calculation. There are several other factors that determine the total amount of qualifying wages that can be claimed as a credit. The average most firms can get for their small business clients is $10,000 per employee. A business with ten employees is likely to qualify for a $100,000 credit.

- For those filing a 941 form, the current turn-around time is 30 to 60 days.

- If filing an amended 941-x, it is taking 90 to 120 days