Claiming an Employee Retention Credit in 2022

Small businesses can still claim an employee retention credit on their 2022 tax returns. In fact, you can file until 2024 for 2020 credits.

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Claiming an Employee Retention Credit in 2022

Here's what you need to know:

  • You can still claim an employee retention credit if you own a small business and had to partially or fully close because of COVID-19
  • Your business can claim a maximum credit of 50% of the wages paid to staff in 2020 and 70% in 2021
  • However, they must be permanent, full-time employees on the payroll, which excludes suppliers and contractors
  • The tax credit is deducted from the taxes you owe as a business and is refundable

You can still claim an employee retention credit (ERC) if you own a small business and had to partially or fully close because of COVID-19. If you haven’t filed for this credit yet but want to relieve your financial burden for 2022, there’s still a window to save.

Your business can claim a maximum credit of 50% of the wages paid to staff in 2020 and 70% in 2021.  However, they must be permanent, full-time employees on the payroll, which excludes suppliers and contractors.

The tax credit is deducted from the taxes you owe as a business and is refundable. Here’s what we know about the current deadlines for ERC, eligibility, and whether we’ll see this tax credit again in the near future.

Is it too late for me to claim the employee retention credit?  

It is still possible for you to claim the ERC because the original program allowed businesses to claim this credit for 3 years. This means you can claim 2020 expenses until April 15, 2024 and 2021 expenses by April 15, 2025.

There is one exception: recovery startup businesses had a January 1, 2022, deadline under the Infrastructure Investment and Jobs Act.

Given the rapidly approaching deadline, it may be a good idea to get a jump-start on tax season with your tax professional to ensure that filing for the credit makes sense for your business.

Am I eligible for the employee retention credit?

Before you apply for an employee retention credit, you must check whether you are an eligible employer.

Eligible businesses are defined as:

  1. Your business needed to be partially or fully non-operational because of the COVID-19 pandemic.
  2. Your business experienced a decline in gross receipts. This is often referred to has the “gross receipts test” and it’s critical for determining your ERC eligibility. The 1st day of the 1st 2020 calendar quarter is marked as the beginning of the decline in gross receipts, which there are 50% less than in the same period during 2019. The decline then ends in the following calendar quarter, and here the receipts needed to be more than 80% of the previous calendar quarter in 2019. The same applies to gross receipts drops for your 2021 return.
  3. Another qualification is your supply chain and vendors were affected by the pandemic, meaning production and productivity were heavily slowed down.
  4. You were unable to offer the same number of services or products as you used to.
  5. Another qualification is that you could not visit your clients on-site due to the restrictions imposed by government order.
  6. You could not travel for business because of the restricted by government order.
  7. Business operating hours were heavily affected during either 2020 or 2021.

It’s important to note that having experienced a lockdown is not a marker of ERC eligibility. Business operations must have been affected by a government order.

What wages qualify for the employee retention credit? 

Your business or organization size is what will determine the wages that qualify for the credit. For instance, if your business had more than 100 permanent employees during the 2020 period, qualified wages can be as high as $10,000 for each employee laid off.

In 2021, the employee count was expanded to 500 employees or less. And, you can earn up to 70% of wages. With that said, the amount will include only what you would pay the employee during the last 30 days before business closure. This includes both salaries and healthcare costs.

There are some exceptions to consider:

  • If you are an employer that is currently a loan recipient of the Paycheck Protection Program provision of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, you will not be eligible. If you have been granted a tax credit for paid sick leave under the Families First Coronavirus Response Act, you are no longer eligible for ERC. This also applies to employees that receive a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code.

What does the application process entail? 

The employee retention tax credit must be filed through Form 941-X. This is a quarterly form that should be submitted the month after a each fiscal quarter. However, you can add this form as an amendment for underreporting or overreporting estimates based on the credit with your annual federal returns.

If you’re eligible, there are 3 simple steps to apply the tax credit to your 2022 taxes:

Collect your payroll data

Because the ERC caters to full-time employees, you must collect your payroll data.

Information you need includes:

  1. Current eligible employees who qualify for the ERC
  2. Those who left the company and details regarding when they left to determine whether it was during the COVID-19 pandemic
  3. Collect all PPP loan papers, which include the date that the loan was given and the amount. You cannot use the same wages listed under the PPP loans. However, the loan does not disqualify you from claiming an RTC.

Compile the 2019 full-time employee information

Having collected the payroll data, you’ll have to gather information on all the full-time workers that worked 20 hours per week in 2019. Information you need regarding the employees includes:

  1. Workplace name and address
  2. When your employee started and last worked for the company

Collect 2019 and 2020 sales and revenue

The employee retention credit requires money from sales collected from 2019 to 2020. Remember that your net income, loss, and the number of permanent employees determine the amount of credit computation.

It’s essential to ensure that you collect as much accurate information as possible to benefit the most from the ERC.

It’s essential to ensure that you collect as much accurate information as possible to benefit the most from the ERC.

How do I calculate the ERC amount that will be granted? 

The total qualified wages and health plan expenses paid for each employee amount to the ERC granted.

ERC for 2020 = 50% of 2020 qualified wages

ERC for 2021 =70% of 2021 qualified wages.

Currently, the maximum credit amount in the year 2021 is $10,000 in 1 quarter. In addition, wages used for PPP loan forgiveness are not eligible.

What’s your biggest 2022 HR challenge that you’d like to resolve

Answer to see the results

Will the ERC be reinstated?

The ERC may be making a comeback with the Employee Retention Tax Credit Reinstatement Act — H.R.6161. A bipartisan group of congressional representatives has introduced this act, sponsored by Senator Margaret Wood Hassan.

But the draft is still in its early stages. The proposed bill still needs to pass the Senate, House, and the President.

If this bill passes, eligible businesses may be able to continue to claim an ERC refund on their 2023 taxes or later.

It’s vital to have an organized payroll system

The key to determining whether or not you should claim an RTC on your 2022 return hinges on your payroll documentation.

Calculating employee wages, benefits, and other vital information isn’t just important for claiming the RTC, but for a snapshot of cash flow. And, of course, having organized payroll software can help you stay on track.

If your team is attached to Excel for payroll tracking, check out our easily customizable Payroll Reporting templates. These professional-grade templates can help you improve accuracy and streamline reporting. That makes it easier to make decisions when it comes to hiring, retention, and tax season.

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