The Small Business Owner Blog - SmartBiz Loans

Employee Retention Credit (ERC): How to Claim Your Payroll Tax Refund

Written by Suzanne Robertson | Feb 27, 2023 6:09:34 PM

The 2020/2021 pandemic and economic shut downs impacted small businesses across America. To mitigate steeper financial damage, the CARES Act was signed into law on March 27, 2020. The act implemented a variety of programs to address financial issues related to the COVID-19 pandemic. 

One component of the CARES Act is the Employee Retention Refund (ERC). It’s a refundable payroll tax credit from the Federal government to help businesses recoup some financial losses from certain periods in 2020 and 2021. SmartBiz, in partnership with trusted, ERC-focused tax consultants, can help eligible businesses claim up to $26,000 per employee in payroll tax refunds. 

How the Employee Retention Credit may help

Because of pandemic-related business closures, a decade-long economic expansion came to a halt early in 2020. Businesses reduced operations or closed completely, resulting in a record number of layoffs. 

The refund, up to $26,000 per employee under the CARES Act, encouraged businesses to keep employees on their payroll. The ERC provides a refundable employment tax credit to help businesses with the cost of keeping staff employed during the pandemic. 

The American Rescue Plan extended the availability of this payroll tax refund  to small businesses for periods through December 2021. Eligible businesses may be able to offset their current payroll tax liabilities per employee per quarter. This credit is generally available to small businesses who saw their revenues decline, or were at least partly closed due to a government order.

What is a small employer for Employee Retention Credit purposes?

A small employer is defined as having 100 or fewer full-time equivalents (FTE) when claiming the 2020 ERC. A small employer is defined as having 500 or fewer FTEs in order to claim the 2021 ERC. The reference point is the same period in 2019. 

Do you qualify for the Employee Retention Credit?

Before you start gathering paperwork, make sure that you meet the requirements to apply for this refund. Typically, you may qualify if you are a small business that meets the following:

  • Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021
  • Qualified as a recovery startup business for the third or fourth quarters of 2021. (A recovery startup business is one that began operating after February 15, 2020, and has annual gross receipts not exceeding $1 million) 
  • Sustained a full or partial suspension of operations due to orders from a government authority during 2020 or the first three quarters of 2021
  • Paid full or part-time wages for W-2 employees during 2020 and 2021

Revenue decline details

The quarterly revenue decline eligibility requirement typically differs based on the year. 

  •  For 2020, the quarterly revenue decline needs to be more than 50%. To determine this, employers would compute their 2020 quarterly revenue and compare it to the same quarter for 2019. 
  • For 2021, the quarterly revenue decline needs to be more than 20%. Employers would compare their 2021 quarterly revenue to the same quarter for 2019. The ERC is available for the first three quarters of 2021.

ERC and the Paycheck Protection Program (PPP)

Businesses that took out a Paycheck Protection Program (PPP) loan in 2020 may still claim the Employee Retention Credit, but they cannot use the same wages to apply for forgiveness of PPP loans and claim the ERC refund. If your business had payroll costs that were more than the amount covered by your PPP loan, you may be able to claim tax credits for those additional payroll costs.

Use caution 

Make sure you review all IRS ERC eligibility requirements and guidance for employers on the use of ERC tax services. Consult with your accountant or payroll specialist if you have questions or need more information. Taxpayers are always responsible for the information reported on their tax returns. 

How can SmartBiz® help?

SmartBiz is on a mission to equip every business owner with access to capital. To that end, we’ve partnered with ERC-focused tax consultants* who  are available to help small businesses navigate the ERC filing process. Start your claim or give us a call.

Additional resources for business owners 

If you’re still recovering from the pandemic and resulting economic shut downs, the SmartBiz blog has resources that may be able to help. 

Are you experiencing cash flow issues? Our guide covers tips on how you may be able to measure and improve your cash flow:  

A Comprehensive Guide to Cash Flow Management

Over spending can affect the bottom line of even the healthiest business.  Here are some ways to help protect your cash flow and decrease your expenses:

Strategies for Business Owners to Help Save Money

Employees can make or break your business. Here are some guidelines to help you hire the right people:

Tips for Making the Right Hiring Decisions

When you need funding, there are typically many options. Learn about the most popular loans available for small businesses here:

Small Business Loans to Consider