If you are a small business owner, you should know about the ERC tax credit 2023.
Surprisingly, many small business owners have not heard about the Employee Retention Credit (ERC or ERTC). Others might have heard about it, but thought it wasn’t applicable to their business.
Thanks to recent updates in legislation, small businesses with just five employees, for example, could be eligible for a credit of up to $215,000 combining 2020 and 2021.
But how do you go about claiming this credit?
Don’t leave money on the table—read on to discover how you can claim the ERC credit for your small business.
What is the Employee Retention Credit (ERC or ERTC)?
The Employee Retention Credit (ERC or ERTC) is a tax credit that was introduced by the US government as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020).
The purpose of the ERC is to provide financial relief to businesses adversely affected by the COVID-19 pandemic. This tax credit acts as an incentive for self-employed business owners to retain their employees and continue their operations.
The ERC gives you a credit even if you don’t owe that much in employee taxes. Excess is straight cash to you.
And, while the program was sunsetted in 2022, you can access the credit by amending your 2020 and 2021 tax returns.
How much is the ERC tax credit worth?
The credit is calculated at:
- Up to 50% of wages and healthcare benefits, to a maximum of $5,000 per employee, per quarter, for wages paid March 12, 2020 to December 31, 2020
- Up to 70% of wages and healthcare benefits, to a maximum of $7,000 per employee, for wages paid in 2021
The credit can be claimed for the first $10,000 in wages and healthcare cost per employee, per quarter.
As an example, a qualifying business had five employees who were retained for the seven quarters of the pandemic. The business may qualify for up to $215,000.
| 2020 | 2021 | |
| Employees | 5 | 5 |
| Eligible quarters | 3 | 4 |
| Max credit per employee per quarter | $5,000 | $7,000 |
| Maximum credit | $75,000 | $140,000 |
| Total credits available | $215,000 |
What businesses are eligible?
To be eligible for the ERC, your business must have continued to pay employees during the period of eligibility. Businesses with up to 500 employees in 2019, including tax-exempt organizations, can benefit from the ERC.
In order to be eligible for the Employee Retention Credit (ERC) in any quarter of 2020 or 2021, businesses and nonprofit organizations must meet one of two criteria (it does not have to meet both):
- Their operations were fully or partially suspended due to a COVID-19-related government order at any point during the year, or
- They experienced a significant decrease in gross receipts for one or more quarters.
To qualify for 2020, a business’s gross receipts during any quarter must have declined by at least 50% compared to the same quarter in 2019. For 2021, gross receipts must have declined just 20% compared to the same quarter in 2019.
To claim a credit for the fourth quarter of 2021, the business must have started after February 15, 2020.
Business sizes:
- Businesses with up to 100 full-time equivalent (FTE) employees in 2019 can claim ERC for 2020
- Businesses with up to 500 full-time equivalent (FTE) employees in 2019 can claim ERC for 2021
Business types:
- Under the above eligibility criteria, almost any business type is eligible if it experienced a significant decline in gross receipts in qualifying quarters compared to 2019
Can my business claim my ERC tax credit 2023?
Originally, employers could claim the employee retention credit if they file quarterly taxes to the government by using Form 941. However, the deadline for the Employee Retention Credit passed on Sept. 30, 2021, but employers can still file for the ERC in 2023.
You can amend previously submitted forms by submitting Form 941-X to retroactively claim the Employee Retention Credit. This retroactive claim can be done for up to three years after your original tax forms were filed.
This means the cutoff to re-file 2020 taxes could be as late as April 2024, and you could re-file 2021 taxes as late as April 2025.
As with any tax filing, working with a knowledgeable tax professional can help you ensure you get the most out of any claims.
Start your ERC claim.What if my business already got PPP?
It’s also possible for small businesses to use both the Paycheck Protection Program (PPP) as well as the ERC.
If a business took out PPP loans in 2020, it can still go back and claim the ERC but cannot use the same wages it applied toward the forgiveness of PPP loans and to count toward the ERC.
If their business had payroll costs that turned out to be more than the amount covered by PPP, they may be able to claim tax credits for those extra payroll costs.
What types of wages are eligible?
To be eligible for claiming credits, qualified wages must have been subject to FICA taxes, including certain health expenses. They should also have been paid during a period or calendar quarter when a business was closed after March 13, 2020, until Dec. 31, 2021.
However, paid leave wages under the Families First Coronavirus Response Act (FFCRA) do not fall under qualified wages. The rules for calculating tax credit for specific health expenses are the same as those for qualified wages, which can be up to 70% of the $10,000 threshold.
The employer and employee’s pretax contributions are part of health expenses. The IRS determines qualified wages based on the number of full-time employees that an eligible employer has.
It’s essential to compare the employee number between 2020 and 2021 for clarity. It’s also worth noting that the number of full-time employees has been revised from 100 to 500.
What you need to know about the ERC tax credit 2023
The ERC tax credit in 2023 is a valuable opportunity for businesses to receive financial relief during the aftermath of the pandemic.
By taking advantage of this tax credit, businesses can retain their employees and continue their operations, despite the economic challenges they may face.
Businesses should consult with their tax advisors to determine if they are eligible for the ERC and to ensure that they are maximizing the benefits of the tax credit.
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