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In the wake of the COVID-19 pandemic, the United States federal government enacted several programs to cushion the financial impact on the nation’s businesses and nonprofit organizations. One part of this broad-based response was the Employee Retention Credit. While the credit expired in 2021, eligible organizations may still claim ERC refunds. With the high stakes involved, every business owner should understand the ERC.
How the ERC Works
The ERC is a component of the 335-page Coronavirus Aid, Relief, and Economic Security Act, which became law on March 27, 2020. The ERC is a refundable tax credit, meaning eligible businesses receive the refund even if they owe no taxes. Proponents of the legislation argued that the credit would help keep employees on company payrolls during shutdowns, aiding both employers and households.
In the CARES Act, the ERC covered the period from March 12, 2020, through January 1, 2021. In December 2020, Congress expanded the ERC qualifying period to June 30, 2021, along with new per-employee limits and eligibility rules. Subsequent legislation extended the ERC one final time to September 30, 2021.
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ERC Eligibility
The long and winding road of the ERC’s legislative history created different rules for two qualifying periods:
- March 12, 2020, through December 31, 2020: For each full-time equivalent employee, businesses may deduct up to 50% of compensation or $5,000, whichever number is lower.
- January 1, 2021, to September 30, 2021: For each full-time equivalent employee, businesses may deduct as much as 70% of compensation or $7,000 — whichever is lower — for each of the period’s three quarters.
Along with the ERC, the CARES Act also created the Paycheck Protection Plan loan program. The PPP featured generous forgiveness provisions, effectively turning some loans into grants.
While the CARES Act prohibited PPP recipients from also claiming the ERC, subsequent legislation allows businesses to claim the ERC as long as they did not use PPP funds for employee compensation. In other words, if payroll exceeds the PPP loan total, an organization may claim the ERC for wages above their loan amount.
Shutdowns and Gross Receipts
If a government-ordered shutdown adversely affected revenue, your organization qualifies for the ERC during any quarter when the mandate was in effect. For much of 2020, many Arizona businesses curtailed or suspended operations under orders from the governor. Nonetheless, ERC eligibility extends well beyond state edicts; federal, county and municipal government orders also apply.
Your business may qualify for the ERC even if your enterprise was not directly named in a government shutdown order. Any business that trimmed or halted operations because a supplier — including out-of-state suppliers — was subject to a shutdown order may claim the ERC for the affected quarters.
Businesses with sizable declines in gross receipts may also qualify. For each quarter in 2020, if your business’s receipts fell 50% or more from the matching quarter in 2019, your business is eligible. For the calendar year 2021, if your business’s gross receipts fell 20% or greater below the same quarter of 2019, your business qualifies for these quarters. Organizations that began operations in 2020 may base their calculations on that year instead of 2019.
How Startups May Qualify for the ERC
Businesses that began life in the challenging 2020 to 2021 period and do not meet other ERC criteria can still qualify for the ERC. The American Rescue Plan Act, passed in March 2021, outlines the Recovery Startup Business program for enterprises that otherwise do not qualify for the ERC. Recovery Startup Business criteria include:
- The business must have at least one eligible employee. Eligible employees may not have an ownership interest that equals or exceeds 50%.
- Gross receipts remained below $1 million for calendar years 2020 and 2021.
- The business did not commence operations before February 15, 2020.
A Recovery Startup Business may claim up $50,000 for each quarter and does not need to meet the employee limits that apply to other ERC claimants.
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More Information on Employee Retention Credits
Understanding FTE and Qualified Compensation
To claim eligibility for the more generous ERC provisions, businesses must have full-time equivalent employee counts below certain limits. Your business’s FTE count may be far below the total employee tally. The key to this puzzle is understanding the Internal Revenue Service’s FTE definition.
The IRS defines a full-time worker as a person who works at least 30 hours per week for at least 120 days per year, with part-time workers falling below that standard. To calculate your business’s FTE headcount for a quarter, follow these steps:
- Divide the total hours your part-time employees worked by the total hours contributed by your full-time workers.
- Multiply your full-time headcount by the ratio calculated in Step 1.
- Add the equivalent workforce calculated in Step 2 to your full-time headcount.
ERC Qualified Compensation Rules
FTEs determine which compensation base your organization may use to claim the ERC. Not surprisingly, different calendar years carry different rules.
- 2020: Organizations with 100 or fewer FTEs in 2019 may use their entire wage base for the ERC refund. Businesses with more than 100 FTEs in 2019 may only count wages paid to employees who did not perform any services — workers paid to stay with the company through a shutdown.
- 2021: Organizations with 500 or fewer FTEs can claim all wages, regardless of whether these employees performed services. Organizations with more than 500 FTEs may only claim the ERC for employees who did not perform services.
Compensation includes more than wages or salaries; organizations may also count contributions to health care plans. For all calculations, the ERC applies only to Form W-2 workers and excludes all individuals whose compensation appears on Form 1099, such as contract workers.
Have a question about a potential case?
or call us at (602) 258-8888
Understanding FTE and Qualified Compensation
To claim eligibility for the more generous ERC provisions, businesses must have full-time equivalent employee counts below certain limits. Your business’s FTE count may be far below the total employee tally. The key to this puzzle is understanding the Internal Revenue Service’s FTE definition.
The IRS defines a full-time worker as a person who works at least 30 hours per week for at least 120 days per year, with part-time workers falling below that standard. To calculate your business’s FTE headcount for a quarter, follow these steps:
- Divide the total hours your part-time employees worked by the total hours contributed by your full-time workers.
- Multiply your full-time headcount by the ratio calculated in Step 1.
- Add the equivalent workforce calculated in Step 2 to your full-time headcount.
ERC Qualified Compensation Rules
FTEs determine which compensation base your organization may use to claim the ERC. Not surprisingly, different calendar years carry different rules.
- 2020: Organizations with 100 or fewer FTEs in 2019 may use their entire wage base for the ERC refund. Businesses with more than 100 FTEs in 2019 may only count wages paid to employees who did not perform any services — workers paid to stay with the company through a shutdown.
- 2021: Organizations with 500 or fewer FTEs can claim all wages, regardless of whether these employees performed services. Organizations with more than 500 FTEs may only claim the ERC for employees who did not perform services.
Compensation includes more than wages or salaries; organizations may also count contributions to health care plans. For all calculations, the ERC applies only to Form W-2 workers and excludes all individuals whose compensation appears on Form 1099, such as contract workers.
Have a question about a potential case?
or call us at (602) 258-8888
Overlooked ERC Opportunities
While many businesses permanently closed their doors in the wake of the pandemic and still others suffered, some enterprises thrived in this period. If your business was among the fortunate few to increase profits, your enterprise may still qualify for an ERC refund. For businesses that suspended activities due to a government order, that condition alone may qualify for at least one quarter.
Some organizations curtailed hours instead of completely shutting down. Grocers that cut back on customer hours to implement extra sanitation measures serve as one example. If your business can document this impairment, this fact may qualify for the ERC even with a modest decline in gross receipts.
Have a question about a potential case?
or call us at (602) 258-8888
Retroactively Claiming the ERC
Unlike the Paycheck Protection Plan, there was no application to claim the ERC. During the eligibility period, organizations simply claimed the credit on their quarterly Form 941 tax returns. If your business did not take full advantage of the ERC, there are three routes to obtain the credit:
- File an amended Form 941 for each relevant quarter. This method is appropriate for most businesses.
- Businesses engaged in farming can claim the refund with an amended Form 944, the IRS’s annual form for agriculture employees.
- Organizations that meet eligibility rules but paid no taxes in the 2020 to 2021 window may file Form 7200, a request for advance payments owing to COVID-19. Businesses that began operations after December 31, 2020, may not file this form.
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The Imperative for Documentation
Submitting IRS forms may not be enough to ensure an ERC refund. The tax agency may demand additional evidence before depositing that refund in your business’s account. Even more than usual, it is imperative to preserve every scrap of documentation on hours worked by each employee. Bear in mind that the IRS pays close attention to employees with ownership stakes in a business.
If a government edict imposed a shutdown, ensure that your business has a copy on record. With supplier interruptions, preserve all email conversations in their entirety. Naturally, the shifting rules covering 2020 and 2021 make the preservation of your organization’s receipts a mission-critical task.
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Evolving Standards and the Value of an Attorney
Multiple acts of Congress defined and revised the ERC in federal law, but the tax credit’s eligibility standards continue to evolve. As with nearly all federal tax legislation, rulings by the IRS continue to refine the ERC’s eligibility standards. What does this evolution mean? If you think your business may qualify for an ERC refund, consulting an attorney is a wise step.
An attorney can offer an up-to-the-minute perspective on your enterprise’s chances of successfully claiming a refund. A lawyer can also evaluate your business’s documentation effort. The IRS demands documentation that is both thorough and concise, a difficult tightwire that an attorney can help your walk. With most attorneys, an initial consultation appointment carries no fee, making this step a risk-free move.
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or call us at (602) 258-8888
ERC Advocacy With Phillips Law Group
If the IRS denied your organization’s ERC request or you believe your Arizona business qualifies for a retroactive ERC refund, the Phillips Law Group may be able to help. We have already worked with hundreds of companies on ERC refunds. Our group has ten offices across Arizona, and consultation appointments are always free. There are no upfront fees, and you will owe us nothing unless we recover ERC funds for you. We invite you to contact us today.
Have a question about a potential case?
or call us at (602) 258-8888
