Employee Retention Credit
The Employee Retention Credit is a provision outlined in the CARES Act, aimed at supporting eligible employers by offering a refundable payroll tax credit for specific wages paid.
Under the 2020 provision, eligible employers can receive a ERC credit equivalent to 50 percent of qualified wages, totaling up to $10,000. These wages must have been paid to employees between March 12, 2020, and January 1, 2021. In 2021, the credit has been increased to 70 percent, applicable to qualified wages paid between December 31, 2020, and October 1, 2021, again capped at $10,000.
To access the ERC funds promptly, eligible employers have the option to reduce their employment tax deposits, which would otherwise be obligatory. Alternatively, if the credit amount exceeds the employment tax deposits, employers can file Form 7200 to obtain a refund directly from the IRS.
Eligible Employers
The ERC Funding or ERC Grant is available to eligible employers who carry on a trade or business, including tax-exempt organizations, that either fully or partially suspended their operations during any calendar quarter in 2020 or 2021 due to orders from an appropriate governmental authority limiting commerce, travel or group meetings due to COVID-19, or experienced a significant decline in gross receipts during the calendar quarter. Employers who are eligible can claim the credit for wages that were paid after March 12, 2020, and before January 1, 2022.
What is Business Suspension Under the Employee Retention Credit?
Several businesses may be unaware that they can still be eligible for the Employee Retention Credit (ERC) even if they did not undergo a decline in revenue during the pandemic, or even if their revenues increased. This particular aspect is often overlooked. In numerous cases, Incentax has assisted companies that initially believed they were not eligible for the ERC Funding due to their businesses not completely shutting down or their revenues not experiencing a decline. However, these businesses often overlook the partial business suspension rules, which come into play when a company makes significant changes in its operations to remain open and comply with government mandates related to COVID-19.
The confusion regarding the Employee Retention Credit (ERC) arises from the ‘Full or Partial Suspension of Business Operations’ test. According to this test, a company qualifies as an “eligible employer” if it meets two criteria. First, the business must have been either fully or partially suspended. Second, the suspension must have been a result of a government order directly related to COVID-19.
This means that even if a business did not experience a complete shutdown, it may still meet the criteria for the ERC if it underwent partial suspension or made significant operational changes due to COVID-19 government mandates. It is important for businesses to understand that the eligibility for the ERC extends beyond revenue declines and encompasses the impact of government orders on their operations.
Many individuals continue to experience confusion when it comes to understanding the Internal Revenue Code’s definition of a “partial” or “full” suspension. These terms prove to be more complex than initially assumed. Naturally, if a business had to shut down, reduce its operating hours, or close its doors entirely due to government mandates, it is likely to qualify for the Employee Retention Credit (ERC).
Businesses that made modifications to their operations due to a government order related to COVID-19 are also encompassed within this definition. The crucial factor lies in whether any shutdowns, operational contractions, or significant modifications occurred “due to a government order related to COVID-19.” In order to qualify as an “eligible employer” for the Employee Retention Credit (ERC), it is necessary for your business’s modifications or closures to have been a direct consequence of a mandate issued by a city, county, state, or federal authority.
You can assess your business’s eligibility for the Employee Retention Credit (ERC) by considering a few straightforward questions:
- Was your business located in an area where COVID-19 regulations were imposed by the city, county, or state authorities?
- Did your business alter its customer or client service approach in response to these government mandates?
- Did your business make operational changes, such as adjustments to staffing or modifications in how employees carried out their duties?
By addressing these questions, you can gain a clearer understanding of whether your business meets the criteria for the ERC based on the partial or full suspension of operations due to government orders related to COVID-19.
If your business meets the aforementioned criteria, there is a possibility that it qualifies for the Employee Retention Credit (ERC). However, if you find the eligibility requirements confusing or require assistance, you are not alone. The experienced professionals at Incentax are available to provide guidance. They specialize in evaluating diverse business scenarios from various regions across the country and possess the necessary insights to navigate your specific situation. By reaching out to Incentax, you can gain a better understanding of how the ERC applies to your business’s unique circumstances. Contact them today to receive the support you need in comprehending the concept of Business Suspension under the ERC.
Gross Receipts for Employee Retention Credit
To determine whether an employer has experienced a significant decline in gross receipts, the following criteria apply:
The calculation begins with the first calendar quarter in 2020, in which the employer’s gross receipts are less than 50 percent of the gross receipts from the same calendar quarter in 2019. This calculation continues until either January 1, 2021, or the first calendar quarter after the quarter in which the employer’s gross receipts are greater than 80 percent of the gross receipts for the same calendar quarter in 2019, whichever comes first.
In summary, if an employer’s gross receipts for a calendar quarter in 2020 are less than 50 percent of the gross receipts for the corresponding quarter in 2019 and this decline continues until January 1, 2021, or until the first calendar quarter after reaching at least 80 percent of the 2019 gross receipts, they would be considered to have a significant decline in gross receipts.
What Wages qualify when calculating the Employee Retention Credit?
When calculating the Employee Retention Tax Credit (ERTC), wages and compensation that are subject to FICA taxes, along with qualified health expenses, are considered eligible. These payments must have been made after March 12, 2020, and qualify for the credit if paid until September 30, 2021. Recovery Startup Businesses, however, had an extended deadline until December 31, 2021, to make these eligible payments and still qualify for the credit.
Indeed, it is important to note that the Employee Retention Credit (ERTC) can only be claimed on wages that are not forgiven or expected to be forgiven under the Paycheck Protection Program (PPP). This means that wages used for PPP loan forgiveness cannot be included when calculating the ERTC.
When calculating qualified health expenses, the IRS provides different methods depending on the specific circumstances. In general, qualified health expenses include both the employer and employee pretax portions, excluding any after-tax amounts.
To determine the qualified wages that can be included for the ERTC, an employer must first establish the number of full-time employees. This information is necessary to determine the wage base and calculate the credit accurately.
Under the employee retention credit (ERTC), a full-time employee is defined as someone who, in any calendar month in 2019, worked a minimum of 30 hours per week or 130 hours in a month. This definition aligns with the monthly equivalent of 30 hours per week.
It’s worth noting that this definition is based on the employer shared responsibility provision in the Affordable Care Act (ACA). This provision helps determine whether an employer is subject to certain requirements under the ACA, such as offering health insurance to full-time employees.
Employee Retention Credit Eligibility of the Business
There are two main paths to qualify for the Employee Retention Credit (ERC) 2023. Companies can qualify through the decline in gross receipts path or the government shutdown path. Additionally, businesses that started during or after the pandemic may be eligible for the Recovery Startup Path.
Under the decline in gross receipts path, a company qualifies if it experienced a decline of more than 50% in gross receipts in any quarter of 2020 compared to the same quarter in 2019, or a decline of more than 20% in any quarter of 2021 compared to the same quarter in 2019.
Under the government shutdown path, a company qualifies if it faced a full or partial suspension of its operations due to COVID-19, resulting in limitations on commerce, travel, or group meetings. This suspension must have been ordered by any US governmental authority.
When calculating the credit, the Employee Retention Credit allows companies to include wages of all W-2 employees, including full-time, part-time, and seasonal employees, paid during the qualified periods of the pandemic. However, there are rules that prevent business owners and their immediate family members from claiming the credit for themselves, and they must be excluded from the calculation.
Filing for the Employee Retention Credit
Can I still apply for the Employee Retention Credit in 2023? How do you file your ERTC?
Yes, you can still apply for the Employee Retention Credit (ERC) in 2023. To file for the ERC Funding, you will need to complete Form 941-X, which is the quarterly payroll report submitted by your business for each calendar quarter. When filling out Form 941-X, you will be required to provide the following information:
- Refundable portion of the credit
- Non-refundable portion of the credit
- Qualified wages utilized
- Qualified health plan expenses utilized
- Detailed explanation of why your company is entitled to the credit
The general rule is that you have up to 3 years from the due date of your original Form 941 filing to claim the ERC Refund. For example, if you are claiming the credit for the second quarter (April, May, June), which has a filing deadline of July 31st, you would typically have until July 31st, 2024, to claim the ERC Funds for that quarter. However, for the purposes of the period of limitations, if your Form 941 for a calendar year is filed before April 15th of the succeeding year, it is considered filed on April 15th. This means that you have until April 15th, 2024, to claim the ERC for 2020 and until April 15th, 2025, to claim the ERC for 2021, based on the IRS example provided on page 6 of the 941-X instructions.
Conclusion
In summary, the Employee Retention Credit is a valuable tax credit that can help eligible employers receive a tax rebate for retaining their employees during the COVID-19 pandemic. To qualify for the credit, an employer must meet certain criteria, including experiencing a significant decline in gross receipts AND/OR a full or partial suspension of operations due to COVID-19, and paying qualified wages to eligible W2 employees.
Need help with claiming your ERC Grant, or just haven’t gotten the time to do it yet? REIL Capital can help you with that! Learn more about it here, and let’s help you get back every penny that your business rightfully deserves.
Should you have any other concerns or inquiries, our team of professionals will be happy to assist you. Send us a message today!
