In response to the COVID-19 pandemic, the Employee Retention Tax Credit (ERTC) was created by Congress in March 2020 to provide small businesses with financial relief. The ERTC has been expanded twice since its inception to offer more assistance to struggling companies. To reduce their federal tax bill, eligible employers can claim the ERTC retroactively by filing Form 941-X for each quarter they paid qualifying wages. Employers have up to three years after the original payroll taxes were due to file this form. As a result, the 2020 ERTC can be claimed until April 15, 2024, and the 2021 ERTC can be claimed until April 15, 2025. This article outlines the details of the ERTC and provides information on how to utilize it.
What Do You Understand by Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a credit designed to alleviate tax burdens for companies that have suffered financial and operational losses during the COVID-19 pandemic in 2020 and 2021. The ERTC’s primary goal is to encourage businesses of all sizes to retain their employees amidst the economic crisis. Eligible companies may receive up to $7,000 per employee per quarter for the first three quarters in 2021, or a total of $21,000 per employee. Additionally, they could qualify for a $5,000 per employee break for the entire year 2020.
The ERTC has undergone modifications over time, making it difficult to keep track of the latest developments. When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020, it included the ERTC as a potential solution for financial relief. However, in the original bill, companies could only choose between a forgivable Paycheck Protection Program (PPP) loan or the ERTC, resulting in a limited number of companies using the credit.
Subsequently, Congress amended the ERTC tax credit in December 2020 in the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA), and then in March 2021 in the American Rescue Plan Act (ARPA), resulting in more businesses being eligible for the credit. If an applicant meets the criteria for the ERC tax credit, they can apply for it within a specific time frame, which allows for up to three years after filing their tax returns or up to two years after making payments, whichever comes later.
Which Companies are Eligible for the ERTC?
The ERC for small businesses was created to help businesses impacted by the pandemic, but not all companies are eligible. Private companies (including nonprofits) must meet at least one of the following criteria:
- They were fully or partially shut down by a local government order in 2020 or 2021.
- Their gross receipts for a single quarter of 2020 dropped by 50% compared to the same quarter of 2019 (for the 2020 tax credit).
- Their gross receipts for a single quarter of 2021 dropped by 20% compared to the same quarter of 2019 (for the 2021 tax credit).
If a company wasn’t in business in 2019, it can use a corresponding quarter in 2020 to demonstrate a revenue reduction between 2020 and 2021 and qualify for the ERTC.
Sole proprietors and government entities are not eligible for the ERTC, but self-employed individuals with employees may qualify for the credit on wages paid to their staff.
Which Employees are Eligible for the Employee Retention Tax Credit?
For businesses with 100 or fewer full-time workers, all of those employees will be considered eligible for the Employee Retention Tax Credit (ERTC), regardless of whether they provide service during the designated period. However, for companies with more than 100 employees, only full-time employees who are being paid but not providing service due to shutdowns and/or a reduction in gross receipts will be counted towards eligibility for the ERTC.
Employers are prohibited from claiming the same employee for both the ERTC credit and the Work Opportunity Tax Credit for the same period. Additionally, employers cannot claim the same wages under ERTC and the employer credit in section 45S for the Family and Medical Leave Act (FMLA).
Determining the Amount of your Employee Retention Tax Credit (ERTC)
Eligible businesses can receive a refundable credit against their Social Security tax payments for up to 70% of the “qualified wages” they paid to their employees. The criteria for “qualified wages” differs depending on the number of employees a company has. For companies with fewer than 500 employees, “qualified wages” include those paid to all full-time employees during a period of full or partial shutdown or during a quarter with a decline in gross receipts. For companies with more than 500 employees, “qualified wages” only include those paid to employees who were not providing services during the same time period. In 2021, “qualified wages” are limited to $10,000 per employee per quarter, meaning that the maximum Employee Retention Tax Credit (ERTC) available is $7,000 per employee per quarter, or 70% of $10,000.
Instructions for Recently Established Companies
The Employee Retention Tax Credit (ERTC) now covers “recovery start-up” businesses, which are newly established companies that commenced operations after February 15, 2020, and have less than $1 million in average revenue over the previous three years. Unlike other businesses, recovery start-ups are not required to demonstrate a decline in revenue or a cessation of operations to be eligible for the credit. Recovery start-ups can claim the credit for the last quarter of 2021, and they are the only companies that qualify for this period.
Combining ERTC and PPP on Payroll
One of the major modifications that Congress implemented to the Employee Retention Tax Credit (ERTC) in late 2020 was permitting companies that received first- and second-draw Paycheck Protection Program (PPP) loans to use the ERTC as well. Previously, businesses that obtained a PPP loan were not eligible for the ERTC; however, this policy was later revised. Companies can now be eligible for the ERTC despite receiving a PPP loan, but they are not allowed to apply the credit to wages paid using PPP loan funds.
Process for Claiming the Employee Retention Tax Credit
To claim the Employee Retention Tax Credit (ERTC), companies are required to disclose their total qualified wages and health insurance costs on their quarterly tax returns (Form 941). The ERTC will be credited against the employer’s portion of Social Security tax. Companies may retain the employment tax value equivalent to the ERTC without penalty or request an advance payment of the ERTC via IRS Form 7200, as long as they have less than 500 full-time employees.
Although the ERTC concluded on October 1, 2021, businesses can still seek a retroactive ERTC refund via Form 941-X. This refund can be claimed for up to three years after the original return or two years after the tax was paid. This implies that eligible companies that didn’t initially claim their ERTC can apply for it up to 2024, depending on their original tax filing or payment date. However, the retroactive refund is only available for the 2020 tax year and the first three quarters of the 2021 tax year; Q4 of 2021 and the 2022 tax year onwards are not eligible for it.
Get Help Filing
While the ERTC can be helpful for businesses, claiming it can be complex. If you think your company is eligible, it’s best to speak with your accountant, payroll preparer, or REIL Capital. They can help calculate the credit size based on your typical Social Security tax payment, and ensure that payroll is not used for both PPP loan forgiveness and the ERTC.
Conclusion
Reil Capital is dedicated to helping businesses navigate the complexities of the ERTC and maximize their tax savings. By partnering with us, businesses can focus on what they do best while we handle the intricate details of the ERTC. Our team of financial experts can guide businesses through the entire process, from determining eligibility to calculating the credit size and filing necessary forms. The best part about working with REIL is that there are no up-front fees associated with the ERTC program!
Contact us today for more details!
