If you’ve been following the Employee Retention Credit (ERC), which is a credit for companies that kept employees on the payroll in 2020 and 2021, you may be somewhat confused about your potential eligibility and how long you have to file for it. For example, a common misconception is that because the ERC was terminated effective September 30, 2021 (except for Recovery Startup Businesses) by the Infrastructure Investment and Jobs Act, it’s no longer possible to claim the ERC. This is an inaccurate assumption–you can retroactively claim it for your business for 2020, 2021, or both.
Before applying for the ERC in 2023, follow these two steps:
1. Verify your eligibilityBefore applying for the Employee Retention Credit, verify your eligibility by making sure you pass the gross revenue or suspended operations tests. Under the gross revenue test, you can be eligible if your revenue decreased by at least 50% for any quarter in 2020 or 2021 compared to the same quarter in 2019. If you don’t qualify under the gross revenue test, use the suspended operations test. To qualify using this test, you must have partially or fully closed your business because of a government order. The government order must have been enacted because of COVID-19, and your business must have been affected by at least 10% or more of your total receipts or service hours worked.
2. Calculate your qualified wagesIf you’ve determined you’re eligible through either of these tests, you need to calculate your qualified wages. This includes wages paid during ERC-eligible quarters in 2020 and 2021. The amount of your ERC depends on two factors: your amount of qualified wages and the size of your company:
- 2020 (100 employees or fewer): You can claim up to 50% of wages paid to working and non-working employees during the ERC-eligible quarters.
- 2020 (over 100 employees): You can only claim 50% of wages paid to non-working employees during ERC-eligible quarters.
- 2021 (500 employees or fewer): You can claim up to 70% of wages paid to working and non-working employees during ERC-eligible quarters.
- 2021 (over 500 employees): You can only claim up to 70% of wages paid to staff who didn’t work during eligible quarters.