Key takeaways:

• What is the ERC? The employee retention tax credit (ERC) is a substantial refundable credit to help businesses keep people on the payroll after pandemic losses
• How much could I get? You can receive up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021
• Am I eligible? To qualify, your business needs to have either shut down because of a government order or lost a significant amount in gross receipts in 2020 or 2021
• How do I claim the ERC? Your Professional Employer Organization will collectively file Form 941 or Form 941-X for all its businesses, which will include your ERC

Businesses of all shapes and sizes suffered from the COVID-19 pandemic, particularly related to shifting to remote work, having to close because of gathering restrictions or losing business in an uncertain economy. The U.S. government passed fast legislation in 2020 and beyond to help support Americans and businesses through these hardships.

One such measure was the introduction of the employee retention tax credit (ERC), which was part of early legislation related to the pandemic. This credit is significant for many businesses, helping them cover payroll taxes and keep people employed.

This guide covers what the ERC is, how it works, eligibility requirements and how to claim it if you partner with a Professional Employer Organization (PEO).

This tax credit, which is a fully refundable credit, was created as part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which was passed in March 2020. It was included as a form of relief to encourage businesses to keep their employees on the payroll during pandemic closures.

The ERC originally concluded at the end of 2020, but it was then extended and expanded by further legislation in 2021. Thus, the 2020 and 2021 credit terms and limits differ, as follows:

2020:

• The credit is 50% of up to $10,000 in wages paid per employee per year
• The total possible credit is $5,000 per employee per year

2021: 

• The credit is 70% of up to $10,000 in wages paid per employee per quarter
• The total possible credit is $21,000 per employee per year (or $7,000 per quarter)

Most businesses can claim the ERC, if they qualify, until Sept. 30, 2021. However, recovery startup businesses can claim it through the end of 2021. These businesses began operations after Feb. 15, 2020, and make less than $1 million in average annual gross receipts. Recovery startup businesses can get up to $28,000 per employee for 2021.

You can still claim this credit retroactively even though the program has technically ended. The employee retention tax credit deadline is three years after you filed the original tax return, or when you paid the tax, whichever is later.

So, who is eligible for the employee retention credit? Many types of businesses qualify since most were impacted in some way by pandemic-related closures and restrictions. There are two ways to be eligible for the credit:

• Your business had to cease operations, either partially or fully, because of a government order, or
• You saw a loss in gross receipts of at least 50% for 2020 and 20% for 2021 quarters, when compared to the same quarter in 2019

In addition, it’s important to understand the difference between a “small” versus “large” employer, since that makes a difference in what you can claim.

In the initial rollout of the employee retention credit in 2020, large employers had more than 100 full-time employees. In 2021, the definition was changed to employers with more than 500 full-time employees. Large employers can only claim the credit for wages paid to employees for not providing services.

Businesses that received a Paycheck Protection Program (PPP) loan during the pandemic can now also claim the ERC, which wasn’t initially allowed. However, you can’t include the same wages in the ERC calculations that were covered by PPP loan funds.

You will need to calculate your ERC based on the size of your business, the number of employees and which quarters of 2020 and/or 2021 you qualify for, based on when your business reduced operations or lost gross receipts.

Typically, employers claim the ERC on Form 941, or they use Form 941-X to amend their return to claim the ERC retroactively. However, the process is a bit different for companies that engage a PEO for services.

PEOs will file collectively for all the companies they work with on a single Form 941. This means you should request that your PEO include your employee retention credit on their aggregate Form 941 or Form 941-X.

Still, the process will include amending the original Form 941 that was submitted on your behalf with the change to add the ERC. A separate Form 941 or Form 941-X needs to be submitted for each quarter you’re claiming the ERC.

It remains to be seen if the ERC will be extended, but the Employee Retention Credit Reinstatement Act was recently introduced in Congress. This act has the potential to extend the credit, but this is not yet a sure thing. In the meantime, it’s best to stay in touch with your PEO regarding any questions or updates you have on this tax program.

When you have questions about the ERC or other tax credits you may be eligible for, StaffLink is here to help. We provide a range of Human Resources (HR) solutions and services to help your organization improve and better support your workforce. When you work with us, you have a dedicated HR partner that shares employee risks and responsibilities with you.

We are a national PEO that bundles payroll, risk management, benefits and more for small and mid-size businesses. Request a proposal or contact us at (954) 423-8262 for more information.