ERC FAQ: 10 Employee Tax Credit Answers For Small Businesses

As a business owner, you search for every tax credit available. Surprisingly, many employers have still not taken advantage of one that can get them thousands of dollars—the Employee Retention Credit (ERC). Introduced initially through the CARES Act, this tax credit ended in 2021, but you can still claim it.

The government is allowing businesses to do a look-back for three years. You may file amendments to your quarterly tax returns from 2020 and 2021 if you did not claim the credits you qualify for.

Eligible employers may claim up to $10,000 per employee for 2020 and $10,000 per employee per quarter in 2021. Check out our ERC FAQ list below to get more information, then contact the Silver Tax Group for assistance in determining your eligibility.

1. What Is an Employee Retention Tax Credit (ERTC) Eligible Employer?

Any private-sector business or tax-exempt organization conducting business or trade during 2020 may be eligible to claim the tax credit if either of the following applies:

1) The businesses gross receipts have a significant decline during the calendar quarter, or

2) Due to government shutdown orders, the business operations experience a partial or total suspension of operations during any 2020 calendar quarter

The shutdown may be due to a limitation on travel, commerce, group meetings, or any other reason due to COVID-19.

If your business was not eligible at the plan’s introduction, you might now qualify due to numerous changes being made to the program. Initially, a company did not qualify if it was receiving a PPP loan. The removal of that restriction means businesses may be eligible for both.

Businesses may now file for retroactive reimbursement. If you are not sure whether your company applied for all tax credit options available, contact the qualified tax attorneys of Silver Tax Group to schedule a consultation.

2. What Does the Employee Retention Credit (ERC) Consider a Trade or Business?

The ERC uses the same trade or business definition as the IRS applies to §162 of the Internal Revenue Code. Neither the Treasury regulations nor the IRS contains a “trade or business” description. Court decisions and Internal Revenue rulings created a list of classifying criteria:

• The activity you conduct with the intent of making a profit or producing income
• You did the activity on a continual, regular basis
• A profit motive must be present, and some economic activity involved
• The activity is distinguishable from activities you do for personal satisfaction
• The activity is the regular occupation that you use to make a profit or living
• You present yourself in public as working in the field of selling services or goods

One of the above factors alone is not enough to show that a trade or business exists, but all the factors do not need to be present.

The code specifies the business must make the activities with continuity and regularity for profit. That doesn’t mean you need to make a profit every year to qualify. As long as the business makes a good-faith effort to be profitable, it meets the requirement.

3. Is Employee Retention Credit Only for Small Businesses?

The number of employees and size of the business do not affect an employer’s eligibility. You meet employer qualifications if government mandates force you to partially or fully shut down operations due to COVID-19. When experiencing a decline in gross receipts of 50% during 2020 or 80% in 2021, in comparison to 2019, you qualify.

A business with less than 500 employees and a 20% decline in quarterly gross receipts from 2019 to 2020 or 2021 qualifies.

The plan is also available for a business with under 300 employees that exhausted their first PPP loan and have a 20% decrease in their quarterly gross receipts.

If you were not in business in 2019, compare your receipts with the same quarter in 2020. If you were a startup in 2019, additional special rules apply to you. Speak with an experienced tax attorney to learn about these options.

Small business employers may claim ERC for all employee wages. Businesses that are not small employers may only claim ERC for wages they pay to employees not working. The reason an employee is not working must be COVID-19 shutdowns or a decline in business.

In addition to the employer qualifications, you must ensure every employee you claim credit for meets the employee qualification requirements under IRS FAQ 59. The IRS finds the following people to be ineligible employees due to their relationship with the business owner:

• Business owner and spouse
• Aunts and uncles
• Brother-in-law, sister-in-law, father-in-law, mother-in-law, son-in-law, daughter-in-law
• Child and decedent of a child
• Nephews and Nieces
• Parents, stepparents, ancestors of parents
• Siblings and step-siblings

Even if these people are full-time business workers, you may not claim employee retention credit for them.

4. Are Self-Employed and Household Employers Eligible for ERC?

Those who are self-employed are not eligible for the Employee Retention Credit unless they employ others. A household employer is not eligible.

A self-employed person may not claim ERC for their self-employment earnings. If they employ others in their trade or business who meet the requirements, they may receive ERC for the employees with qualifying wages.

A household employer does not meet the qualifications of a trade or business and is not eligible for ERC. This applies to their household employees only.

If a household employer also operates a trade or business and reports employment taxes, they may claim ERTC for employees of the trade or business. If they list their household employees on the same Form 941 or Form 944 they use in their trade or business, they may not claim the Employee Retention Credit for the household employees.

5. Can Employers in U.S. Territories Receive the Employee Retention Credit?

If you are an employer in any U.S. Territories, you may claim ERC credit for all qualifying wages. Refer to §2301(c)(5) of the CARES Act to determine a qualifying wage. The Act lists IRC §3121(a) for this determination per the Federal Insurance Contributions Act (FICA).

Wages that employers in the U.S. Territories pay to employees are subject to FICA. This means those employers with qualifying wages may receive ERC if they meet all other eligibility requirements.

6. Can Tax-Exempt Employers Get the Employee Retention Credit?

According to § 501(c) of the Internal Revenue Code, a tax-exempt organization that is exempt from tax is considered a trade or business with regard to its operations. If the organization is exempt from taxes under IRC 501(a), it may be eligible for ERC.

Tax-exempt organizations are deemed to be active in a business or trade regarding the entirety of their operations. Qualifying businesses include museums, schools, hospitals, churches, and performing art centers. To qualify, they must meet all other requirements for an eligible employer.

7. How Does the Government Determine an Organization’s “Instrumentality?”

The tax code does not define “government instrumentality.” A definition in Revenue Ruling 57-128, 1957-1 C.B. 311 uses six factors in determining instrumentality:

1) If it performs a government function and its use is for a government purpose

2) If its action is on behalf of at least one or more states or political subdivisions

3) If the states or political subdivisions have the interests and powers, an owner, or if there are any private interests involved

4) If public authority or authorities are vested in the supervision and control of the organization

5) If an express or implied statutory or other authority exists for the creation or use of the instrumentality

6) The source of operating expenses and degree of financial autonomy

The entity must also have a separate existence from the political subdivision in addition to the above six factors. The determination of ERC eligibility uses all the facts and circumstances of the individual instrumentality.

8. Can Local, State, and Federal Government Entities Receive ERC?

Local, state, and federal governments and any political subdivisions of those governments are not eligible for ERC. Agencies or instrumentalities of those governments are also ineligible and may not receive the ERC. The exception is tribal entities and governments that qualify as eligible employers.

9. Are Tribal Entities and Tribal Governments Eligible For ERC?

Tribal entities and governments that conduct a business or trade may qualify for ERC if they meet the requirements. Because tribal governments are not subject to tax, the IRS and Treasury Department’s decision is that IRC §162 is not appropriate for determining whether a tribal government is conducting a business or trade for ERC.

Tribal governments are considered a trade or business only for the purpose of ERC. All activities by the tribal government are deemed to be part of the trade or business activities. Any entity a tribal government (tribal entity employer) considers to share the same tax status as a tribal government will receive consideration as a tribal trade or business.

Entities that are not a tribal government or trial entity-employer need to use §162 to determine their eligibility for ERC.

How Aggregation Rules Apply to Tribal Entities and Tribal Governments

When determining ERC, tribal entities and governments must use the aggregation rules from §§ 52(a), 52(b), 414(m), and 414(o) of the Internal Revenue Code. When deciding on the application of aggregation rules, the governments and entities must use a good-faith interpretation.

Aggregation rules deal with gross receipts to determine whether the taxpayer qualifies for a small business exemption under §163(j). The Income Tax Code and Income Tax Regulations contain all aggregation rules.

10. How Is the ERC Claimed Retroactively?

You may amend your filings of Form 941 by filing amended tax returns using Form 941-X. The instructions indicate lines 18, 26, 30, and 31 are those relative to ERC. You may amend your form within three years of the original or within two years of paying the tax reported on the form, whichever is later.

When filing, both wages and benefits qualify for credit. You may include health insurance benefits you continue paying to employees not working. Wages you may claim include:

• Employees providing services on a part-time or full-time basis different than their work before the pandemic
• Employees not working but receiving wages

You need to make sure the employees you claim meet the ERC standard of “not working” when claiming the credit. If your company is receiving PPP loan forgiveness, you may not use the same wages for claiming ERC. To claim ERC and PPP, wages must be sufficient to cover both.

Do not assume your payroll service or CPA is claiming your credits. Payroll services are not attorneys and do not analyze legal rights and requirements. The ERC is a credit you claim on your quarterly Form 941, not on the annual tax return your Certified Public Accountant prepares.

Experienced tax attorneys follow the law as congress enacts new statutes. The ERC underwent numerous changes in the short period between its initiation in 2020 and its end in 2021.

The Silver Tax Group will review your business filings and assist you in amending your quarterly returns using Form 941-X if you qualify for a refund. This is not a loan, it is a refund, and you will receive a check from the government for monies due to you.

Un-Muddle the Confusion

While the government intends to help employers with losses they experience due to COVID-19, understanding and following the rules and regulations is like wading through a huge mound of mud. In addition to the CARES Act, changes were made to the rules by:

• The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act)
• The American Rescue Plan Act of 2021 (ARP Act)
• The Infrastructure Investment and Jobs Act (Infrastructure Act)
• IRS Notices 2021-20, 2021-49, 2021-23, 2021-49, 2021-65
• Revenue Procedure Notice 2021-33

The best way to make sure you receive all credits you qualify for and your filings comport with the law you need to speak with experienced tax attorneys. Attorneys follow the ever-changing rules and are familiar with tax law.

It doesn’t matter whether you have a large corporation or a small business; tax season can feel daunting, so get the help you need.

Where to Get Erc Tax Credit Help

Don’t lose out on claiming up to $10,000 to $28,000 per employee in 2020 and 2021. The government is allowing a 3-year look-back on the Employee Retention Credit. If you qualify for additional credit, we can help you with filing amended Form 941-X forms and answer any other tax-related questions you may have.

If you haven’t applied for your ERC tax credit or think you may be eligible for additional credit after reading our ERC FAQs, contact Silver Tax Group today.