What is the employee retention credit in 2020?
For the past 2020 tax year, businesses across the globe faced unprecedented challenges due to the COVID-19 pandemic. To help alleviate financial strain on small and medium-sized businesses in the United States, the government introduced an initiative called Employee Retention Credit (ERC).
This refundable payroll tax credit was designed to encourage employers to retain their workforce during these challenging times, with a maximum refundable tax credit of $5,000 per employee in 2020.
Our comprehensive guide will walk you through everything you need to know about ERC Credit for 2020 – from understanding eligibility criteria and claiming processes to its benefits for your business. This tax credit can be claimed retroactively and there is still time to file, even in 2023 and 2024.
Key ERC Credit Takeaways You Will Learn:
- Introduction of ERC in 2020: A refundable payroll tax credit designed to aid employers during the COVID-19 pandemic.
- Eligibility Requirements: Criteria include a significant decline in gross receipts and suspension of operations due to COVID-19.
- Claiming Process: Involves calculating credit amount, completing IRS Form 941, and retaining necessary documentation.
- Benefits for Businesses: Offers financial relief, such as improving cash flow, reducing tax liability, and supporting employee benefits.
- Retroactive Claims: Businesses can claim the credit retroactively for prior quarters in 2020 and 2021.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
Understanding ERC Credit
ERC Credit is a refundable payroll tax credit designed to help eligible employers retain employees during the COVID-19 pandemic.
Defining ERC Credit And Its Purpose
The Employee Retention Credit (ERC) is a pro-business initiative designed to help employers, small and medium-sized businesses, retain employees during the COVID-19 pandemic.
A refundable payroll tax credit provides eligible employers financial relief by reducing their share of Social Security taxes.
For example, if an employer in the retail industry was forced to close its doors temporarily because of local lockdown restrictions but continued paying wages to its employees, it could apply for ERC.
Eligibility Criteria For ERC Credit
To benefit from the Employee Retention Credit (ERC), small to medium-sized business owners must meet specific eligibility criteria, which include:
1. Experiencing a significant decline in average annual gross receipts: For 2020, an employer’s gross receipts must be less than 50% of the same calendar quarter in 2019.
2. Operating a trade or business in 2020: Only employers actively carrying on a trade or business during the eligible periods may qualify for the ERC.
3. Having had complete or partial suspension of operations due to COVID-19: The ERC applies if your business was subject to government restrictions related to COVID-19, leading to an inability to operate at its standard capacity.
4. Not having received a PPP loan: Employers who received funding through the Paycheck Protection Program (PPP) are not eligible for the ERC in 2020.
5. Paying qualified wages: The credit applies only to qualified wages paid to employees during periods of economic hardship caused by COVID-19.
6. Ensuring payroll costs comply with IRS guidelines: To claim the credit, employers must follow specific guidelines set forth by the Internal Revenue Service (IRS) regarding payroll costs and wage calculations.
By meeting these criteria, small to medium-sized business owners can take advantage of the valuable financial relief the ERC offers during these challenging times.
Benefits Of ERC Credit
The Employee Retention Credit (ERC) offers several advantages to small and medium-sized business owners, the employee retention tax credit providing them with much-needed financial support during these challenging times. By leveraging the ERC for their businesses, employers can:
1. Improve cash flow: The refundable payroll tax credit can help businesses maintain liquidity by reducing their employment tax liability.
2. Retain employees: With ERC’s focus on employee retention, employers can utilize this credit to continue paying wages and help prevent layoffs during the pandemic.
3. Reduce tax liability: As a refundable tax credit, any excess amount not used to offset payroll taxes will be refunded to the employer, further reducing the overall tax burden.
4. Support employee benefits: Besides the wages paid to employees, qualified health plan expenses are also eligible for the ERC calculation, helping employers cover healthcare costs for their workforce.
5. Benefit from retroactive claims: Eligible businesses can claim the credit retroactively for prior quarters in 2020 and 2021, possibly resulting in significant backdated credits.
6. Combine ERC with other credits: Employers may leverage the recovery startup business opportunities and work opportunity tax credit alongside the ERC if they meet the eligibility criteria for each program.
7. Adapt to evolving circumstances: The Consolidated Appropriations Act of 2021 expanded the ERC’s provisions by increasing maximum credit amounts and extending its availability, offering increased support against ongoing economic challenges.
By utilizing the Employee Retention Credit effectively, small and medium-sized business owners can protect their companies from potential financial hardships while focusing on growth and sustainability in a post-pandemic landscape.
How To Claim ERC Credit
To retroactively claim the ERC credit, employers must make sure they are eligible and provide the required documentation, including a Form 941 for each quarter and a worksheet to calculate the credit amount; it’s also crucial for them to retroactively claim the ERC if they missed it in prior quarters.
Process And Required Documentation For Claiming ERC Credit
To claim your business’s Employee Retention Credit (ERC), you need to follow a specific process and provide the necessary documentation. Here are the steps:
1. Determine eligibility: Before claiming the ERC, ensure your business meets all the eligibility criteria outlined by the IRS.
2. Calculate credit amount: Use the credit calculations and methodology provided by the IRS to calculate your ERC credit amount.
3. Complete Form 941: Include your ERC credit on Line 11c of Form 941, Employer’s Quarterly Federal Tax Return.
4. Retain documentation: Keep all documentation related to qualifying wages paid, including tax forms and payroll records.
5. File for a refundable employment tax credit: If you’re eligible for a refundable ERC credit and have reduced deposits of employment tax deposits or taxes, you can file Form 7200, Advance Payment of Employer Credits Due to COVID-19 to request an advance payment of your ERC credit.
Remember that claiming the ERC requires attention to detail and accuracy in reporting qualified wages paid during each calendar quarter claimed on Form 941. Make sure you understand all requirements before submitting any documentation or forms.
Tips For A Successful Claim
To ensure a successful claim for the Employee Retention Credit (ERC), small to medium-sized business owners should follow these tips:
1. Understand the eligibility criteria: Review the requirements for eligibility, including the significant decline in gross receipts or, full or partial suspension of operations due to COVID-19.
2. Keep accurate records: Maintain proper documentation to support your claim for ERC, including payroll records, tax filings, and financial statements.
3. Seek professional guidance: Consult with an experienced accountant or tax advisor to determine your eligibility and prepare your claim accurately.
4. Know how to calculate the credit: Understand the maximum ERC amount per employee, which increased from $5,000 in 2020 to $7,000 per quarter in 2021.
5. Monitor any changes in legislation: Keep up-to-date with changes in regulations related to the ERC and other government assistance programs.
6. File your claim on time: Ensure you file your ERC claim on time and include all required documentation with your quarterly payroll income tax return filings.
By following these tips, small to medium-sized business owners can successfully claim their eligible ERC credit amounts and receive much-needed financial support during these challenging times.
Calculating ERC Credit
To calculate your ERC credit, you need to know the methodology for calculating it and the maximum amount of credit available; read on to learn more about how to make the most out of this valuable support.
Methodology For Calculating ERC Credit
To calculate qualified wages and qualify the ERC for employee retention credit work amount, employers must determine their qualified wages and eligible employer status. The qualified wages are based on the employee retention credit rate of 70% for 2021, up to $10,000 per quarter per employee.
Eligible employers claim a maximum credit of $7,000 per quarter per employee in 2021.
For example, if an eligible business had ten employees whom each earned at least $10,000 in qualified wages during the first through fourth quarter each of 2021 and experienced a significant decline in gross receipts, they could potentially receive up to $700,000 ($7,000 x 10 employees x four quarters) in payroll tax credits from the ERC program.
Maximum Amount Of ERC Credit
The maximum ERC credit businesses can claim has increased from $5,000 per employee in 2020 to $7,000 per eligible employee per quarter in 2021. This means eligible employers can receive up to $21,000 in tax credits for each qualifying employee this year.
To calculate your business’s maximum ERC credit amount, multiply the number of qualified employees by $7,000 and then by the number of quarters you are claiming the credit for.
For example, if you have ten qualifying employees claiming the ERC credit for all four quarters of 2021, your maximum credit amount would be $280,000 ($7,000 x 10 x 4).
Keep in mind that there are eligibility requirements and other factors that could affect your final credit amount.
ERC Credit Vs
The ERC Credit and PPP are different because the ERC provides a refundable payroll tax credit, while the PPP offers forgivable loans to help businesses cover expenses.
Differences And Advantages/Disadvantages Of the ERC Credit And Paycheck Protection Program
The Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) are both relief measures designed to help businesses cope with the challenges posed by the COVID-19 pandemic. However, there are notable differences in purpose, eligibility requirements, and benefits. The following table compares the critical aspects of ERC Credit and PPP, highlighting their differences and advantages or disadvantages for small to medium-sized business owners.
| ERC Credit | PPP |
| Refundable payroll tax credit available to employers | Loan program for small businesses with a forgivable portion |
| Designed to help employers retain employees during the pandemic | Intended to help businesses cover payroll and operational expenses |
| Maximum credit of $5,000 per employee in 2020 | Loan amount based on 2.5 times the average monthly payroll costs |
| Subject to a gross receipts test for eligibility | No gross receipts test requirement |
| Claimed on quarterly payroll tax filings | Loan forgiveness application required after the covered period |
| Reduces the employer’s share of Social Security taxes | Loan forgiveness amount is not taxable income |
| Can be claimed by businesses that experienced a revenue decline | Available to businesses with fewer than 500 employees |
| ERC can be claimed retroactively for 2020 | PPP loans are no longer available for new applications |
Although both ERC Credit and PPP offer financial relief for businesses, the choice between the two depends on the specific needs and circumstances of your business. It is essential to carefully consider the implications of each program and consult with a professional to determine the best course of action for your small to medium-sized business.
Eligibility For ERC Credit In 2020
To be eligible for ERC credit in 2020, businesses had to either significantly decline gross receipts or experience full or partial suspension of operations due to government orders related to COVID-19.
Criteria For Eligibility In 2020
To be eligible for the Employee Retention Credit (ERC) in 2020, small to medium-sized business owners must meet the following criteria:
1. Business Operations: Your business operations must have been fully or partially suspended by government order due to COVID-19 during the calendar quarter.
2. Significant Decline in Gross Receipts: Alternatively, your entire quarter’s gross receipts must have declined by at least 50% compared to the same last quarter or the preceding calendar quarter in 2019. Eligibility continues until your gross receipts exceeded 80% of the same calendar quarter in 2019.
3. Number of Employees: There are two different categories for eligibility based on the average number of full-time employees you had in 2019:
– If you had less than 100 full-time employees, all wages paid to your full time employees during an eligible period qualify for ERC regardless of whether the full time employee had worked.
– If you had more than 100 or fewer full time employees, full time employees, part-time employees, and only wages paid to fewer full time employees who did not work during an eligible period qualify for ERC.
4. PPP Loan: If you received a PPP loan, you might still be eligible for ERC, but certain limitations apply.
Meeting these eligibility criteria can help your small to a medium-sized business receive cash flow assistance, reduce tax liability and support employee retention through ERC.
Exceptions And Exclusions
Small to medium-sized business owners should be aware of some exceptions and exclusions to the Employee Retention Credit (ERC) eligibility criteria. Here are some key points:
1. Businesses that received Paycheck Protection Program (PPP) loans in 2020 cannot claim the ERC for wages paid with those funds.
2. Certain government entities, including state and local governments, are not eligible for the ERC.
3. Employers who have experienced a severe decline in gross receipts, defined as a decline of 90% or more compared to the same calendar quarter in 2019, can claim the credit for all wages paid during that same quarter only, regardless of whether the employee was providing services or not.
4. Employers not in operation for all or part of a calendar quarter in 2019 can use the corresponding quarter in 2020 to determine their eligibility for the ERC.
5. Employers who receive certain other tax credits, such as Work Opportunity Tax Credit or Empowerment Zone Employment Credit, cannot claim those credits on wages used to calculate the ERC.
It’s essential for small to medium-sized business owners to understand these exceptions and exclusions when determining their eligibility for the ERC. A qualified tax professional can help navigate these complexities and ensure businesses receive all available benefits under current regulations.
Current Updates On ERC Credit For 2020
As of 2021, the ERC has been extended until December 31, and there have been changes in eligibility criteria and an increase in the maximum amount of credit available.
Extension Of ERC Credit To December 31, 2020
The ERC Credit has been extended to December 31, 2020, providing additional relief applicable to employment tax returns for eligible employers who have experienced a significant decline in gross receipts due to the pandemic.
This extension means businesses can continue to claim the credit for qualified wages paid during this period even if they have already exhausted their Paycheck Protection Program (PPP) funds.
The amount of the credit has also increased, with eligible employers able to claim tax credits of up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021.
Changes In Eligibility Criteria
The Employee Retention Credit (ERC) eligibility criteria changed in 2021, making it easier for small and medium-sized businesses to qualify. Under the Consolidated Appropriations Act, those employers can now claim ERC even if they received a PPP loan, as long as they do not use the same wages to pay for both programs.
Additionally, severely financially distressed employers who experienced a significant decline in gross receipts – 50% or more compared to the same fourth quarter in 2019 – can now claim up to $10,000 per employee per quarter instead of just $5,000.
Increase In Maximum Amount Of ERC Credit
For business owners struggling during the pandemic, the maximum amount of Employee Retention Credit (ERC) increased significantly in 2021. Eligible employers can now claim up to $7,000 per employee per quarter – an increase from $5,000 in 2020.
This means businesses eligible for ERC credit last year will see even more significant relief this year. As a refundable payroll tax credit available to employers that have experienced considerable revenue losses or been forced to shut down due to COVID-19 restrictions, the ERC is designed to help retain employees and keep businesses going during this difficult time.
Industries That Benefit From ERC Credit In 2020
Industries such as hospitality, retail, and transportation have been hit hard by the pandemic and are among those that may benefit from claiming ERC credit.
Sectors That Have Been Hardest Hit
The COVID-19 pandemic has profoundly impacted various industries across the United States. Some of the sectors that have been hardest hit and are eligible for ERC credit in 2020 include:
1. Hospitality and tourism: With travel restrictions and social distancing guidelines, hotels, restaurants, and other businesses in the hospitality industry have seen a massive decline in revenue.
2. Entertainment: Closing cinemas, theaters, sports venues, and other entertainment facilities has resulted in significant losses for these businesses.
3. Retail: Non-essential retail stores have been closed or operating at reduced capacity for extended periods, leading to a sharp decrease in sales.
4. Transportation: Airline companies and public transportation services are among the worst affected by the pandemic due to travel restrictions and widespread cancellations.
5. Healthcare: Although healthcare is an essential service sector, many providers have experienced financial difficulties due to increased costs associated with providing services and personal protective equipment (PPE) and decreased demand from patients who fear contracting COVID-19.
The ERC credit can assist eligible businesses in these struggling sectors by reducing tax liability, offering cash flow support, and employee retention assistance. To know if your business qualifies for the ERC credit or help claim it, consult with our team of experts today.
Examples Of Industries Eligible For ERC Credit
The ERC Credit is available to many industries, including:
1. Hospitality: Hotels, motels, restaurants, bars, and other establishments have seen a significant decline in gross receipts due to the pandemic.
2. Healthcare: Providers of medical and healthcare services who have experienced a decline in gross receipts or had to reduce business hours due to a public health emergency.
3. Manufacturing: Businesses that produce goods for sale, such as equipment manufacturers, food processors, and textile companies.
4. Retail: Businesses that sell merchandise directly to consumers through storefronts or online channels, including clothing stores, electronics retailers, and home furnishings outlets.
5. Transportation: Companies involved in transporting people or goods, such as airlines, trucking firms, and courier services.
6. Entertainment: Venues that provide live entertainment or produce films or television shows.
7. Construction: Contractors and subcontractors engaged in building new structures or improving existing buildings.
8. Education: Private schools and colleges have experienced a reduction in revenue due to the pandemic.
9. Non-profit organizations: Charitable organizations impacted by declining donations or event cancellations.
These are just some examples of industries eligible for ERC Credit; however, it’s important to note that eligibility may vary depending on individual circumstances and qualifications.
Benefits Of ERC Credit For Businesses
The ERC Credit provides businesses with cash flow assistance, reduces tax liability, and supports employee retention during the pandemic.
Cash Flow Assistance
The ERC provides much-needed cash flow assistance to businesses during these challenging times. The credit is refundable, meaning that if the credit exceeds an eligible employer’s payroll tax liability for a quarter, the excess will be refunded to the eligible employer.
This means that qualifying businesses can receive a sizable refund from the government even if they do not owe any payroll taxes. For example, suppose an employer owes $4,000 in Social Security taxes for a quarter but has $7,000 in qualified employee wages for which it can claim the ERC.
In that case, they can reduce their Social Security tax liability to zero and receive a $3,000 refund.
Reduction In Tax Liability
One of the most significant benefits of ERC Credit for small to medium-sized businesses is the reduction in tax liability. This credit reduces an employer’s share of Social Security taxes, which can ultimately result in significant savings.
For example, if your company has 50 employees and qualifies for the maximum credit amount of $7,000 per employee in a quarter, you could save up to $350,000 on payroll taxes alone.
It’s important to note that claiming the ERC requires careful documentation and adherence to specific eligibility criteria. Our team is available to help guide you through this process so that you can maximize your benefit while avoiding any potential audit or compliance issues.
Employee Retention Support
One of the primary benefits of the Employee Retention Credit (ERC) is employee retention support. The ERC helps eligible employers keep employees on their payroll during difficult times, such as the COVID-19 pandemic.
For example, suppose an employer has experienced a significant decline in gross receipts or has been partially or fully suspended due to government orders related to COVID-19. In that case, they may be eligible for the ERC.
This credit can offset some of the costs of retaining employees, including wages and qualified health plan expenses.
Overall, the ERC serves as an essential lifeline for small to medium-sized businesses struggling through these challenging times by providing critical employee retention support that helps keep operations running smoothly into 2021 and beyond.
Conclusion and Summary: ERC Credit for the 2020 Tax Year
In conclusion, the ERC Credit has been a valuable lifeline for businesses during the pandemic, providing much-needed financial relief and employee retention support. As we move into 2021, it’s essential to keep an eye on any updates or changes to the program, as further extensions or adjustments could benefit eligible employers.
Importance Of ERC Credit During the COVID-19 Pandemic
The Employee Retention Credit (ERC) has become a lifeline for many small to medium-sized businesses during the COVID-19 pandemic. It offers eligible employers a refundable payroll tax credit designed to help retain employees and keep their business running despite financial challenges.
The ERC can provide significant relief, reducing an employer’s and employee’s social security taxes, and helping cover wages paid for employees not working due to the pandemic. This is particularly important as we continue to navigate uncertain economic conditions, with many businesses struggling to maintain cash flow while attempting to avoid layoffs or furloughs.
Potential For Extension And Further Changes To ERC Credit Eligibility And Amounts
As we move further into 2021, there is potential for the Employee Retention Credit to be extended or adjusted to serve better businesses impacted by the pandemic. With recent changes increasing the maximum credit amount and expanding eligibility criteria, it’s essential for small to medium-sized business owners to stay informed about these developments.
As legislation continues to evolve in response to ongoing economic challenges presented by COVID-19, it’s more important than ever for businesses to stay up-to-date on available relief options.
Good news. There is still time to file! The employee retention tax credit can still be claimed retroactively and there is still time to file, even in 2023, 2024, and 2025 for the past tax years.
Employee Retention Tax Credit (ERC / ERTC) Help: Claim Up To a $26,000 Refund Per Employee for Your Business
Disaster Loan Advisors™ can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program, without you having to pay an excessive percentage of your hard earned ERC refund.
DLA doesn’t charge a percent like many companies do. Our flat fee structure is fair and reasonable based on the amount of work involved. Keep More of Your Refund™
Depending on eligibility, business owners can receive up to $26,000 to $33,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable IRS tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount $ of employee retention tax credit your company qualifies for.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™
- 941-X: 14. Section 3121(q) Notice and Demand—Tax on Unreported Tips, Form Instructions (revised 2024) - April 26, 2024
- 941-X: 12. Taxable Medicare Wages & Tips, Form Instructions (2024 updates) - April 24, 2024
- 941-X: 11. Taxable Social Security Tips, Form Instructions (revised 2024) - April 23, 2024