If your business was impacted by either a disaster or COVID-19, you may be eligible to receive the Employee Retention Credit (ERC).  It is a refundable credit against payroll taxes that was originally introduced in the CARES Act, expanded by the Consolidated Appropriations Act (CAA) signed into law on December 27, 2020, and broadened even further with the March 2021 American Rescue Plan Act (ARPA).

In essence, the ERC is a tax credit on a percentage of qualifying wages paid to employees for a specified period of time. While we can’t cover every detail of this complex tax break, we hope to raise awareness of this topic so that businesses that qualify can benefit.

To qualify, your business operations must have been either fully or partially suspended by a COVID-19 governmental order or have experienced a drop in gross receipts.

From the CARES Act, qualified wages must have been paid between March 13, 2020 and December 31, 2020.  The CAA provides for wages paid from January 1, 2021 through June 30, 2021 and covers gross wages plus the employer cost of health insurance. The ARPA extends the dates to include the third and fourth quarters of 2021 and adds Medicare.

If a business has received a PPP loan, the same wages used to apply for PPP loan forgiveness cannot be used to qualify for the ERC, but the business can get both tax breaks. This requires a great deal of strategy to maximize the payouts for each tax break.

To claim the credit, you may reduce your employment tax deposits and reflect the reduced deposits on Form 941, file an amended 941X to retroactively get the credit, or (for small employers with less than 500 employees) apply for an advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

There is no double-dipping of credits allowed; employers who take this credit cannot also take a credit for Paid Family Medical Leave on the same qualified wages.  Furthermore, if an employee is included for the Work Opportunity Tax Credit, he/she may not also be included for the Employee Retention Credit.  It is important for employers to evaluate which credit is more financially beneficial to their businesses.

The Employer Retention Credit can be a windfall for some businesses. Some tax professionals may overlook this credit since it is connected with payroll taxes, an area they do not normally get into.  Do not let them!  Be sure to ask your tax professional to help you claim all of the credit you deserve by law.