Employee Retention Credit (ERC) Frequently Asked Questions
An Overview of the Employee Retention Credit (ERC) Payroll Tax Refund Program For Businesses, Churches And Schools
Determine If Your Business, Church, Religious Organization or School Qualifies.
What is the Employee Retention Credit Payroll Tax Refund?
The Employee Retention Credit (ERC) payroll tax refund is a CARES Act authorized tax refund to employers who kept employees working and were affected by government orders, suffered significant declines in gross receipts, or started new businesses during COVID-19.
Does My Business Qualify For The Employee Retention Credit?
The IRS recognizes three distinct tests to qualify for the ERC.
- Gross Receipts Test
In the first, second, and third quarters of 2021, if gross receipts were reduced by more than 20% in comparison to the organization’s gross receipts in the same calendar quarter of 2019, the employer qualifies as an Eligible Employer for each of three quarters.
The gross receipts decline requirements for 2020 to 2019 require a decline greater than 50% and the employer qualifies as an Eligible Employer for one quarter.
IRS Gross Receipts Definition:
Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses. It does not include sales taxes.
- Government Mandate Test
Businesses, non-profits, or churches that experienced fully or partially suspended operations due to orders from an appropriate governmental authority to limit commerce, travel, or group meetings due to COVID-19 can qualify for the ERC.
The period that the employer pays qualified wages lasts only as long as the government mandates are in effect. Businesses that had normal operations for parts of their business but experienced full or partial suspension of other operations may also qualify for the ERC.
Examples of full or partial suspension of operations include the following:
- A local or state order requiring employees to work from home
- A restriction on public gatherings (e.g., wedding receptions, other events)
- Capacity limitations imposed on public or private spaces requiring the cancellation of pre-planned conferences
- Recovery Startup Business Test
New businesses or non-profits started during COVID-19 may also qualify for ERC payroll tax refunds. The IRS provided clarity on the definition of a qualified Recovery Startup Business (RSB), specifying that an RSB employer must:
- have started carrying on their trade or business after Feb. 15, 2020,
- have average annual gross receipts averaging under $1 million for the tax year preceding the third and fourth quarters of 2021,
- and not be otherwise eligible for the ERC due to suspended operations or a decline in gross receipts.
- A qualified RSB is eligible to receive up to a maximum of $100,000: $50,000 ERC per quarter for the third and fourth quarters of 2021.
What Are The Maximum ERC Payroll Tax Refunds?
A business, non-profit or church that is eligible for the ERC on the basis of the Gross Receipts Test and/or the Government Mandate Test may qualify for four separately calculated ERCs that can yield up to $26,000 per Employee
- 2020 ERC
- Maximum credit = $5,000 per employee for one quarter
- Reported on forms 941-X for the qualifying quarter
- 2021 Quarters 1, 2 and 3 ERC
- Maximum credit = $7,000 per employee each quarter
- Reported on Form 941-X for each qualifying quarter
ERC Overview Conclusions
Due to changes in eligibility rules and the substantial number of COVID government orders limiting the normal activities in 2020 and 2021, many churches, schools, for-profit and non-profit organizations are now receiving substantial payroll tax refunds that were previously ineligible.