By Andrew Leonard, CPA

Although it has been two years since Congress introduced the Employee Retention Tax Credit (ERC) to help businesses and non-profits keep workers employed through the COVID-19 pandemic, many qualifying entities failed to claim the credits on their 2020 and 2021 tax returns. The good news is there’s still time for employers to request a retroactive refund.

What is the Employee Retention Credit?

The ERC is a refundable credit available to qualifying entities that continued to pay workers through the pandemic despite suffering interruptions to normal operations or a significant decline in gross revenue. For 2020, a qualifying decline is defined as one in which gross receipts during any quarter in 2020, beginning after March 13, 2020, are less than 50 percent of gross receipts for the same calendar quarter in 2019. For 2021, the decline in gross receipts during any of the first three quarters of the year must be less than 80 percent of what they were during the same quarter in 2019 or 2020.

The amount of the credit available for 2020 is $5,000 per employee. An additional $21,000 credit per employee is available to employers who continued to pay workers between January 1 and September 30, 2021. Therefore, a business with 50 employees could receive as much as $1.05 million in refundable ERCs for all of 2021 plus an additional $250,000 if they met the more stringent eligibility requirements in 2020.

One reason businesses may be missing out on claiming the ERC is because of the confusion created by two years of changing IRS rules and regulations. For example, businesses that received Paycheck Protection Program loans and were previously ineligible for the ERC may now apply for a refund.

In addition, the latest regulations make it possible for a “recovery start-up business” to qualify for the credit when they 1) launched after February 15, 2020, and 2) had average annual gross receipts of less than $1 million. Under these circumstances, a business established during the pandemic may still have an opportunity to claim the ERC for wages paid after June 30, 2021, and before January 1, 2022. The maximum allowable credit for a recovery start-up business is $50,000 for each of the third and fourth calendar quarters of 2021.

When Must I Apply for a Refund of the Employee Retention Credit?

Under the law, qualifying employers, including for-profit businesses and nonprofit entities, have three years from the date of their original return filing to claim a refund by filing IRS Form 941-X. Therefore, employers have until April 15, 2023, to file an amended payroll tax return and receive retroactive credits for the first quarter of 2020. The same three-year rule applies to each subsequent quarter.

Contact Us

To help you navigate the ERC and yield valuable credits, please reach out to your professional CPAs and advisors.

About the Author: Andrew Leonard, CPA, is a managing director with PKF Advisory, where he provides tax structuring, pre-immigration planning and a wide array of international tax and consulting services to international companies, entrepreneurs, families and foreign trusts. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-8902 or aleon@pkfadvisory.com.