The COVID-19 pandemic was challenging for many small businesses, and Congress passed the Employee Retention Credit as part of the CARES act to help companies retain their staff. The ERC is a refundable payroll tax credit that gives eligible business owners tax credits for 50% of employee wages and health insurance expenses incurred during lockdowns.

The maximum credit an organization can claim for each employee was $5,000 in 2020. In 2021, the credit was raised to 70% of qualifying employee expenses for a maximum of $7,000.

While the ERC program ended on October 1st, 2021, for most businesses with the passage of the Infrastructure Investment and Jobs Act, employers can claim the tax credit retroactively for up to three years. Here is how to check if your business is eligible for the ERC.

Was Your Organization Financially Impacted by COVID-19?

The Employee Retention Credit program helped businesses financially impacted by the COVID-19 pandemic by providing an incentive to keep employees on their payroll. Companies deemed “non-essential” must verify that they had limited or suspended operations due to a federal, state, or local order. For example, restaurants that were not allowed to have dine-in services but could provide takeout would count as having had “limited operations.”

Did You Have at Least Four Full-time Employees in 2020 and 2021?

Companies with at least four full-time employees in 2020 and 2021 may be eligible for the ERC. However, the qualifying criteria differ depending on the organization’s number of employees.

Employers with 100 employees or fewer can receive credit for wages paid to all employees, whether they worked or not. On the other hand, employers with over 100 employees in 2019 or earlier can only receive credit for wages paid to employees who did not work during the calendar quarter.

A Significant Decline in Gross Receipts From 2019

To qualify for the Employee Retention Credit for the 2020 tax year, you must verify that gross receipts declined by over 50% compared to 2019. If you are filing for 2021, gross receipts must be 80% below what they were in 2019. However, if your organization was not in business in 2019, you can compare gross receipts to 2020.

Did You Apply for the Paycheck Protection Program (PPP) Loan?

While businesses were initially unable to qualify for the ERC and PPP loan, a COVID-19 relief package signed into law in December 2020 changed the rule so companies could receive both. The rule change is retroactive, so qualifying organizations that received a PPP loan can also use employee expenses earned after March 12th, 2020, to become eligible for the ERC.

Can You Claim Credit for the Final Quarter of 2021?

While the Employee Retention Credit expired for most businesses on October 1st, 2021, recovery startups beginning operations on or after February 15th, 2020, are eligible if they had average annual gross receipts of $1 million or less.

How to Claim the ERC

To claim the ERC, employers must report all qualified salaries and employee health insurance costs on IRS Form 941x. Furthermore, business owners must have paid the income between March 13th, 2020, and September 30th, 2021 (through the end of 2021 for recovery startups). Employers cannot use the ERC for theirs or certain relatives’ wages.

Filing for the Employee Retention Credit can be a complex task. Contacting a tax professional who understands your unique situation may be helpful to ensure your company follows each step correctly. Furthermore, the IRS has a frequently asked questions page that may answer additional questions.