Does the ERTC Interact with State Unemployment Programs?

October 6, 2023
Dayes Law Firm

The COVID-19 pandemic was a tough time for business owners, many of whom were forced to furlough or lay off employees. If your business managed to keep employees on payroll during the pandemic, you could qualify for the Employee Retention Tax Credit, or ERTC.

State unemployment programs also provided enhanced benefits to furloughed workers through December 2020. Here’s what you should know about the ERTC and unemployment if your employees took advantage of these benefits.

About the ERTC

The ERTC is one of several tax credit opportunities for businesses that struggled during the pandemic. For 2020, employers can claim up to $10,000 in qualified wages per employee for a total credit of $5,000 per worker. For 2021, businesses may claim up to $10,000 per employee per quarter for a max credit of $21,000 per employee.

According to IRS FAQs on the ERTC, employers are eligible to claim this credit if:

  • They had to at least partially suspend operations because of a government order limiting travel, commerce, or group meetings.
  • They had a serious drop in gross receipts for the year.

To meet the gross receipts criteria, you must have had either:

  • For 2020, at least an 80% drop in gross receipts compared to the same quarter in 2019
  • For 2021, a drop in gross receipts of at least 20%

If you think you qualify, you can claim the credit retroactively by filing IRS Form 941-X.

On September 14, the IRS announced “an immediate moratorium through at least the end of the year on processing new claims for the pandemic-era relief program” as a result of increased fraud concerns. 

IRS Commissioner Danny Werfel noted in the announcement, “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.” He noted that when it comes to claiming the credit, “businesses should seek out a trusted tax professional who actually understands the complex ERC rules.”

If you choose to work with a tax professional on your Employee Retention Tax Credit application, you’ll have a team that thoroughly understands the ERTC and tax code on your side. That might make you less likely to turn in an incorrect claim to the credit.

Enhanced Unemployment Benefits

Unemployment benefits, also called unemployment insurance, are intended to assist people who are available to work but are currently unemployed. The Pandemic Unemployment Assistance Program extended state unemployment programs through December 31, 2020.

These benefits include:

  • A $600 weekly federal payment in addition to state unemployment benefits
  • A waiver of the one-week waiting period
  • An extension of the number of weeks an individual can accept benefits

The Pandemic Unemployment Assistance Program provided benefits to those who would normally be unable to claim them. This includes people who were unemployed because of:

  • A COVID-19 diagnosis for themselves or a member of their household
  • Needing to watch their children at home during COVID-related school closures
  • The closing of their place of employment in response to a government order

Those eligible for unemployment may still claim the Earned Income Credit as well. To be eligible, they must have worked (or been self-employed) the same year they accepted unemployment checks.

Can You Claim the ERTC for Employees Who Took Unemployment?

Understanding the interaction between ERTC and unemployment benefits can be tricky. The ERTC is a tax credit for employers who kept paying workers, so can you claim the credit if your employees accepted unemployment benefits?

To be eligible to claim the ERTC, you must have continued paying workers. If those workers had to claim unemployment because you couldn’t pay them, you can’t claim the credit for them.

Whether you can claim the credit also depends on whether you are a large or small employer. Large employers (those with more than 100 employees in 2020 or more than 500 in 2021) can only claim the credit for wages paid to employees who weren’t providing services for the company. Small employers are eligible regardless of whether employees were providing services or not.

Contact Us With Questions About the ERTC and Unemployment Programs

Now that you’ve learned a bit more about the ERTC and unemployment benefits, you’re probably wondering where to turn next. If you’re unsure how to claim the credit or want to know whether your business qualifies, reach out to Dayes Law Firm at (866) 567-4510 today.