Do You Qualify for the ERC Tax Credit? Eligibility, Explained
The ERC tax credit legislative updates have caused some confusion about the eligibility and deadline. Here's everything you need to know.
Aug. 18 2022, Published 1:48 p.m. ET
Congress decided to reward businesses that continued to offer employment at the height of the COVID-19 pandemic. It offered the reward in the form of a tax credit called the Employee Retention Credit (ERC tax credit). Who's eligible for the ERC tax credit? When is the ERC tax credit deadline?
A tax credit is a type of financial relief designed to reduce your tax liability. For example, if you owe $3,000 in taxes and you have access to a $500 credit, then your tax bill would come down to $2,500. Some credits are refundable, which allows you to receive the excess amount in cash. Say you owe $1,200 in taxes and have $2,000 in refundable credit. In that case, the credit would completely offset your tax and leave $800 that you can take out as cash.
How does the ERC tax credit work?
After the COVID-19 pandemic struck, Congress took various measures to prevent the economy from slipping into a recession. For example, it authorized direct payments to households through stimulus checks. Those payments went out in three rounds, offering amounts between $600 and $1,400.
For businesses, Congress offered the Paycheck Protection Program (PPP) and Employee Retention Credit to prevent job losses. The PPP is a forgivable loan while the ERC is a credit against payroll costs.
The ERC tax credit applies to payroll expenses. It covers payroll costs for 2020 and part of 2021 for eligible employers. For payroll expenses incurred in 2020, the credit is worth up to $5,000 per employee per quarter. That works out to about $20,000 for the whole year.
For 2021 payroll expenses, the ERC tax credit is worth up to $7,000 per employee per quarter. The credit is available for the first three quarters for the 2021 period. As a result, the maximum ERC tax credit amount a business can claim for 2021 is $21,000 per employee.
How is the ERC tax credit calculated?
The credit is calculated as 50 percent of up to $10,000 in wages paid in 2020 for each staff member. For 2021, the credit applies at the rate of 70 percent of up to $10,000 in wages paid in the year.
See if you're eligible for the ERC tax credit.
The ERC tax credit legislation has been updated multiple times, with the changes impacting eligibility. As per the latest updates, you may be eligible for the credit if your business suffered a significant loss in 2020 or 2021 because of the pandemic.
If the government’s COVID-19 orders forced your business to shut down or suspend part of its operations for some time, you may also qualify for the ERC tax credit. Another eligibility test is whether pandemic orders forced your business to modify its operation or workplace. You only need to pass one of these eligibility tests, not all of them. Businesses that received PPP loans can also apply for the ERC tax credit.
When is the ERC tax credit deadline?
The credit is available against payroll expenses incurred up to September 2021. However, businesses have up to three years from when the program ended to look at their past payrolls to determine if they are eligible for the credit. As a result, the deadline to claim the credit is around September 2024.