Employee Retention Credit is available to eligible small business employers who have been in operation and employ at least one full-time individual for a minimum of 6 months and the ERC starts on the first day of the next tax year. Eligible small business employers can also take the credit if they hire an individual or otherwise make an employment-related offer to a previously unemployed individual.
Criteria
There are three types of small businesses eligible to take the ERC:
- New Company
- Acquisition Companies
- New Firm
In addition to the above, a qualifying entity may also be described as having:
- An establishment that has been in existence for at least 6 months after it started operations, or an entity that has become an individual employer under section 164 of the Internal Revenue Code.
- The new small business entity must be incorporated or established and in existence as a registered corporation, partnership or trust under the laws of the United States, and must not be an employee.
- The acquiring company is a subsidiary of a qualifying entity with the specified characteristics.
- In addition to these characteristics, a qualifying acquisition company must have filed a Schedule C with the IRS at least 90 days before the acquisition transaction.
- The acquiring entity must have filed its Form 10-K with the SEC at least 60 days before the acquisition.
- Within 90 days after the closing of the acquisition transaction, a qualifying acquisition company must file a Schedule K-1 to report the acquired entity’s net operating losses. Because the entity acquired is now a new taxable entity, it will be subject to the transition tax, as well as any carry-forward losses from the qualified small business entity.
This change was in effect on April 15, 2018. The new entity must make a contribution of the net operating losses to the credit of qualified small business. The net operating losses, net of allowable federal and state income taxes, must not exceed:
- This amount does not include any state income taxes that the company paid.
- This limitation is reduced by a percentage based on the number of full-time equivalent employees of the qualified small business entity before the acquisition.
This limitation on the amount of net operating losses is reduced by:
To be eligible for the credit, the new qualified small business entity must maintain its qualifying small business status, must not change the number of full-time equivalent employees of the qualified small business entity, and must not change its tax-exempt status or engage in any mergers or acquisitions.
For example, if a company engages in a merger or acquisition, this is not a change in number of employees of the qualified small business entity, so the limit is reduced, but the net operating losses do not count against the total limit, because the company can still make use of the existing net operating losses and still count against the limit. The ERC is an anti-abuse provision and is therefore meant to benefit all the qualified small business entities within the same qualifying acquisition.
Employee Retention Credit FAQs
Here are top FAQs About Employee Retention Credit:
- What is Employee Retention Credit?
The Employee Retention Credit is designed to encourage business to hire new employees by providing financial incentives for qualifying employers. The ERC provides tax relief on up to 30% of the wages paid to qualifying new employees for the first 6 months of employment. This credit is available for both new hires that receive wages above the minimum wage (generally $10.00 per hour), as well as for new hires who are paid less than the minimum wage. ERC can be used for the hiring of any employee who meets the ERC requirements and the new hire must also be directly employed by the employer.
- Can ERC be used to hire a qualified non-immigrant worker?
Yes. If the new hire qualifies for ERC, then the ERC can be used for the hiring of any qualified employee. ERC also allows you to hire a new employee if you have retained him or her for at least 6 months in the previous year, and he or she was not a qualified employee on the date that you retained that employee. Therefore, for example, if you retained an employee who was promoted to a position or transferred into the company in the prior year, the employee can still take advantage of the ERC.
- Can I hire an employee on a temporary or project basis for a specific period of time?
No. ERC is available only for direct hires. Temporary or project work is not eligible for ERC. It is worth noting that temporary or project work in the United States may not qualify for ERC. If the new hire is hired as a project worker (for example, to make prototype drawings) for a period of 6 months, the credit will not be available.
- Can I hire an employee to fill in for a key employee?
You can take ERC for the first 6 months of employment if the employee you hire is replacing a qualified employee who has been terminated or left the company. Examples include when an employee on an L-1 visa leaves or is fired or becomes permanently disabled.
- Can I hire a temporary or project worker as a replacement for a temporary or project worker on EI?
No. If an EI qualified employee is being replaced by an ERC qualified employee, then the ERC credit will not be available. It is also worth noting that ERC is not available for hire of an individual who is paid under the minimum wage.
- Are unemployed individuals eligible for ERC?
Yes. If you hire an unemployed individual (new or previously unemployed) who is able to work immediately for $10.00 per hour or less, then the ERC credit can be used.
- Is a former employee ineligible for ERC?
No. A former employee is not ineligible for the ERC if the employee’s removal from the employment relationship (e.g., laid off, terminated) occurred before the ERC was introduced. The former employee must have been employed for at least 6 months in the year before his or her departure and be paid at least $10.00 per hour.
- Is ERC eligible to hire an employee who was on an employer’s payroll during the year in question but has not worked for the employer in the 6 months immediately preceding the year in question?
Yes. It is possible to take the ERC for the first 6 months of employment provided that the employee is not eligible for EI (i.e., he or she is not an EI qualifying employee) and is not employed by the employer in the 6 months immediately preceding the 6 months in question.
- Is an independent contractor (i.e., self-employed person) ineligible for ERC?
No. An independent contractor is ineligible for ERC if he or she has been on the employer’s payroll or is a qualified employee. However, if the employer has specifically exempted the independent contractor from EI eligibility requirements (e.g., he or she is self-employed or has a contract with the employer to do work outside of regular working hours), then the independent contractor may qualify for ERC.
- Can I hire a new employee to fill in for an existing employee?
No. This is not an eligible use of ERC.
- Can I hire an employee in connection with a merger or acquisition of an existing company or firm?
No. This is not an eligible use of ERC.
- How can I verify the eligibility of an employee I hire?
You can obtain a letter from the employer that details the employment relationship, the business purpose for hiring the employee, and the reason for separation. If the employee’s EI eligibility or transfer to a visa is unclear, you can confirm that the employee is eligible using the eligibility verification tool.
- I have a temporary or project worker on EI. Can I use ERC on the temporary or project worker?
Yes. You can take ERC on the temporary or project worker provided that he or she is not an EI qualifying employee and that the temporary or project worker is hired under the same requirements as an EI qualifying employee.
- If I hire a temporary or project worker for the purposes of an EI hire, is ERC available for the temporary or project worker as well?
No. If you hire a temporary or project worker under an EI hire for the purposes of a temporary or project worker (e.g., one who is replacing a temporary or project worker on EI), then you can take the ERC for the first 6 months of the temporary or project worker’s EI entitlement. If the temporary or project worker is not a qualified employee (i.e., not an EI qualifying employee), then you cannot take the ERC for the first 6 months of the temporary or project worker’s EI entitlement.
- Is it possible to hire an employee in connection with a public-sector hiring?
Yes. If you hire an employee on behalf of the federal government or the province of Quebec under a public-sector hiring, you can take ERC on that employee provided that the employee is not an EI qualifying employee and that the employee is hired under the same eligibility requirements as an EI qualifying employee.
- If I have an employee whose employment ends or is terminated before the completion of the year in question, will ERC be available on the employee in that position?
No. You cannot take ERC on an employee whose employment ends or is terminated before the completion of the year in question.
- Can I hire an employee on behalf of another company?
Yes. The employer can hire an employee on behalf of another company, provided that the employer of the other company grants the employee a waiver. The employee must have been directly hired by the second employer. The employee is not eligible to take ERC on the second employer.
- What is the maximum ERC entitlement under the EI program for a Canadian citizen?
The EI program does not allow for ERC on permanent residents.
- What is the maximum ERC entitlement for a foreign national?
The maximum ERC entitlement under the EI program is $16,674.
- Can an individual be issued multiple ERC over the course of the year?
Yes, multiple ERC are possible. For example, a worker may be issued an ERC for a period of work and an ERC for work that is seasonal, part time, or off-contract. The amount of ERC issued can be provided to you in advance of the employee’s pay period.
- What is the ERC refund process?
You must submit an ERC claim and pay the payroll tax for ERC you do not use within 30 days. Please note that the ERC is not refundable if the EI employee is terminated and you are not required to pay payroll tax on the full amount. However, you may apply for an ERC refund if you do not use ERC for a specific purpose, such as hiring a worker that was not authorized.
- What are the ERC processing and processing fees?
The processing fee is $25 per form that you need to submit to the labor market authority. The processing fee is also waived if you do not submit all the required documents to the labor market authority within 30 days of the end of the EI qualifying period.
- Is it possible to refund ERC that I have applied for if I hire a temporary or project worker after the EI qualifying period?
No. You cannot refund ERC that you have applied for if you hire a temporary or project worker after the EI qualifying period.
- Can I keep ERC that has been issued?
No. You cannot keep ERC that has been issued.
- How is the ERC managed for each project?
Every project is reviewed by the human resources or labor market authority to ensure that it conforms to the federal government’s objectives for the hiring of temporary or project workers.
- What if I fail to hire a temporary or project worker under a public-sector hiring?
You will not be able to get ERC on a non-EI qualifying employee you hire, as long as you do not take out ERC on an EI qualifying employee. If you have been issued ERC on an EI qualifying employee, but fail to hire the worker, you can apply for ERC cancellation. The ERC will be cancelled and you will have 30 days to reapply.
- What are the guidelines for ERC cancellation?
EI workers are classified as EI qualifying employees, so if you hire a non-EI qualifying employee and later have a change in your working plan or the worker is terminated and you are not required to pay payroll tax on the full amount, you may be eligible for cancellation.
- I hired a temporary or project worker in September 2014 under an EI project. Is my ERC on him still valid?
Yes. Your ERC was issued at the end of the September 2014 qualifying period and is valid until the end of 2015. You will not need to reapply for ERC if you hire a worker in January 2016.
- I hired a temporary or project worker in September 2014 under an EI project. Does ERC still apply?
Yes. Your ERC was issued at the end of the September 2014 qualifying period and is valid until the end of 2015. You will not need to reapply for ERC if you hire a worker in January 2016.
- How do I know that the temporary or project worker is EI qualified?
Your temporary or project worker is required to undergo the official confirmation process. The office responsible for verifying the worker’s EI eligibility will collect proof of qualifications from the employer and submit this to the labor market authority.
- What if my temporary or project worker is fired before the EI qualifying period?
If your temporary or project worker is fired before the EI qualifying period and you did not request ERC, you will need to apply for ERC. You should also inform your former temporary or project worker of the cancellation process.
- I want to hire a temporary or project worker for one year, will I have to apply for ERC?
No. If you hire a worker for less than one year, you do not have to file for ERC.
- If I hire a temporary or project worker for one year, will I have to pay payroll tax?
No. There is no EI job loss tax for temporary or project workers, but they must file the federal tax return, except for minors.
- Do temporary or project workers get EI employment insurance benefits when they are laid off?
No. Temporary or project workers who are laid off must apply for EI severance benefits before applying for EI severance benefits for a similar period.
- What does “temporary or project worker” mean on my Employment Insurance claim?
The term “temporary or project worker” means a worker who works on an on-demand basis or on a short-term or temporary basis and is hired by an employer as a direct employee of that employer.
- Can I hire a temporary or project worker for less than one year?
Yes, you may hire a temporary or project worker for less than one year.
- Can I hire a temporary or project worker if I have a change in my working plan or the worker is terminated and I am not required to pay payroll tax on the full amount?
Yes. You may hire a temporary or project worker as long as you do not have a change in your working plan or the worker is terminated and you are not required to pay payroll tax on the full amount.
- Why ERC is only paid for up to a year?
The ERC is payable for up to 12 months. When you hire a worker, you must certify your ERC position every six months. If you hire a worker and later have a change in your working plan, you must reapply for ERC before paying payroll tax on the full amount of ERC.
- Why can’t I hire a worker for more than a year?
The maximum time limit of employment of a temporary or project worker is six months. If you hire a temporary or project worker after the six months have passed, you are required to file an application for extension of employment.
- My temporary or project worker is on EI status for more than six months. How can I get my EI payment?
If your temporary or project worker is on EI status for more than six months, they can apply for EI payments once they are on leave. They can also file an application for EI benefits if they are still working.