ERC Explanation
Have questions about the Employee Retention Credit? Worry not! Read on to find answers to commonly asked questions.
What is the Employee Retention Credit, and how do I know if I qualify?
The Employee Retention Credit (ERC) program was put in place to help businesses recover from revenue losses caused by factors related to COVID-19. It rewards businesses who held onto their employees despite financial uncertainty and turbulence during the pandemic.
ERC credit amounts are substantial; qualifying businesses can receive as much as $5,000 per employee if their profit losses were in 2020, and up to $10,000 per employee per quarter if they experienced losses in 2021. This brings the maximum total for 2021 losses to $26,000 per employee for the year.
Over 30,000 small businesses have participated in this program, receiving over $1 billion in credits during 2021. You may want to apply for this credit right away, but there are certain qualification requirements and you’ll likely have questions on how the ERC may affect your taxes. We’ll try to answer all the most common questions below about what the ERC is and how we can help you claim it.
Is this a tax refund?
The ERC is a refundable tax credit. “Refundable” in this context just means that if your credit is higher than the amount of taxes owed, you will receive a refund for the difference.
Businesses claim the ERC when they file their taxes. However, this has created a timing issue for the majority of eligible business owners, who didn’t know about or have the opportunity to claim the credit during the year they were eligible.
The IRS has clarified that ERC deductions must be reported on the tax return for the year in which the losses occurred. This means that anyone who is currently looking to claim an ERC credit can’t claim it on their 2022 returns. Instead, they need to file an amended return using Form 941-X.
Is an ERC credit considered taxable income?
No, the ERC is not considered taxable income, but if you claim it, it will retroactively affect your tax returns. If you claim the credit for 2021 wages, this credit will need to be reflected on your 2021 tax return, regardless of whether you have already received a refund.
The IRS has rules disallowing businesses from including certain credit amounts in their expense deductions. This means that businesses who claim the ERC will need to omit the credit amount from their deductions for wages paid that year. This will effectively increase taxable income by decreasing wage deductions. For example, if a business receives $250,000 as an ERC credit, they will need to reduce their deductible wage expense amount for that tax year by $250,000. This means they will be taxed on an additional $250,000 in income for that year.
If you claim an ERC credit for your business, you will need to file an amended payroll tax return to reflect your reduced wages paid. This may affect the refund amount you received or are currently entitled to receive.
This may sound discouraging at first, but chances are the credit amounts any eligible business is entitled to receive will far exceed any additional tax burdens incurred by claiming the credit.
Will the ERC impact my next tax return?
Since the ERC needs to be claimed on either 2020 or 2021 returns, it should not affect your next filing.
What qualifies a business for ERC aid?
Generally, a business can qualify if they meet at least one of the following criteria:
- Your business experienced significant reductions in business hours or project delays due to COVID-19 shutdowns
- Your business experienced a significant decline in gross receipts during 2020 or 2021 due to factors related to COVID-19
If a business does not meet the above criteria, they may still qualify for ERC aid if they can be considered a "Recovery Startup Business". A business must meet specific standards to be considered a Recovery Startup Business under the American Rescue Plan, and has to have started operations after February 15th, 2020.
Go to our ERC Calculator
The ERC program can be a major benefit for eligible businesses, but claiming the credit can be confusing and complex. We can help you navigate the process of claiming it with ease, to ensure you receive all the funds you are entitled to.
See if you qualify for the Employee Retention Credit now by utilizing our ERC Calculator.
