The Employee Retention Credit (ERC) is a fully refundable credit that targets businesses with employees (w2s) in 2020 and 2021. These businesses must have been impacted by the pandemic, mainly either 1) reduction of sales (50% reduction in 2020 quarter versus 2019 quarter or 20% reduction in 2021 quarter versus 2019 quarter) or 2) partial or full government shutdowns, but there are other qualifying factors (i.e unable to make deliveries or lack of supplies from vendors). The ERC for 2020 is up to $5,000 per employee (between March 13, 2020 through December 31, 2020) and the ERC for 2021 is up to $21,000 per employee (between January 1, 2021 through September 30, 2021).
Business owners will have to follow these steps to claim the credit: 1) perform an analysis to ensure the requirements are met as this payroll credit might be audited by the IRS, 2) run scenarios to maximize the credit for each employee based on qualifying wages (you cannot double count any Paycheck Protection Program or similar programs) and finally 3) amend the 941 Employer’s
Quarterly Federal Tax Return (filing 941x indicating that the rationale for the change is claiming this credit).
We recommend following professional guidance in order to maximize the credit and avoid interest and/or penalties with the IRS for errors in the payroll form 941 or in any potential subsequent audit. Tax professionals, following IRS updates, have been able to clarify different areas of this tax credit that were previously litigious and unclear.