The Employee Retention Tax Credit (ERTC) is a significant financial relief program designed to help businesses that faced revenue losses during the COVID-19 pandemic. This refundable tax credit aims to incentivize businesses to retain employees on their payrolls during periods of economic hardship. The ERTC has undergone several changes since its inception, making it essential for businesses to understand the eligibility criteria and how to claim the credit. This article provides a comprehensive overview of the ERTC, its eligibility requirements, and the steps businesses can take to claim this valuable tax credit.
What is the Employee Retention Tax Credit (ERTC)?
The ERTC is a refundable tax credit created under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It was designed to provide financial relief to businesses that suffered revenue losses due to the COVID-19 pandemic. The credit has been expanded and modified through subsequent legislation, such as the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA) and the American Rescue Plan Act (ARPA).
Eligible businesses can claim the ERTC for qualified wages paid to employees during specific periods in 2020 and 2021. The amount of credit a business can claim depends on the number of employees and the wages paid during the eligible period. In general, businesses can claim up to $5,000 per employee for 2020 and $7,000 per employee per quarter for the first three quarters of 2021.
ERTC Eligibility Criteria
To qualify for the ERTC, businesses must meet one of the following eligibility criteria:
1. Full or Partial Shutdown
Your business was fully or partially shut down due to government orders in 2020 or 2021. This includes closures related to social distancing rules, curfews, or any other restrictions that directly impacted your business operations.
2. Decline in Gross Receipts
Your business experienced a significant decline in gross receipts during a specific quarter. For 2020, your gross receipts must have decreased by at least 50% compared to the same quarter in 2019. For 2021, your gross receipts must have fallen by at least 20% compared to the same quarter in 2019.
If your business was not operational in 2019, you can use a corresponding quarter in 2020 as a reference to demonstrate a revenue reduction between 2020 and 2021.
Who is Eligible?
Eligible employers include private companies, non-profit organizations, and certain tax-exempt institutions such as public colleges, universities, and hospitals. However, government entities and sole proprietors are not eligible for the ERTC. If a self-employed person has staff on payroll, they may qualify for the ERTC for wages paid to other employees.
Limitations
It is crucial to note that wages reported as payroll costs for the Paycheck Protection Program (PPP) loan forgiveness or certain other tax credits cannot be claimed for the ERTC in any tax period.
How to Claim the Employee Retention Tax Credit
To claim the ERTC, businesses must follow specific guidelines based on the period when qualified wages were paid. The process involves using the appropriate forms and instructions for the relevant tax period.
Forms and Instructions
Claiming the ERTC requires using the correct revision date for the applicable tax period.
For 2020, businesses should use Form 941 or Form 941-X to report their qualified wages and claim the credit. For 2021, businesses should use the updated Form 941 or Form 941-X to claim the ERTC for the first three quarters. These forms can be filed up to three years after the original payroll taxes were due, which means that employers can claim the 2020 ERTC until April 15, 2024, and the 2021 ERTC until April 15, 2025.
Beware of Third-Party ERTC
Schemes The Internal Revenue Service (IRS) has issued a warning to employers about the potential risks associated with third parties advising them to claim the ERTC when they may not qualify. For more information, refer to IRS News Release IR-2023-40 and COVID Tax Tip 2022-170.
Penalty Relief
The IRS provides information on penalty relief related to claims for the Employee Retention Credit. Employers must ensure they meet the eligibility criteria before claiming the credit to avoid penalties.
How to Calculate the ERTC
The ERTC amount depends on the number of employees and the qualified wages paid during the eligible period. For businesses with 100 or fewer full-time employees, all employees count toward eligibility, regardless of whether they were providing services during the designated period. For businesses with more than 100 employees, only full-time employees who were paid but not providing services due to shutdowns or a reduction in gross receipts count toward eligibility.
The maximum ERTC available for 2020 is $5,000 per employee, while for 2021, it is $7,000 per employee per quarter for the first three quarters. To calculate the ERTC, eligible businesses can claim a refundable credit against their Social Security tax on up to 70% of the qualified wages paid to employees. ERTC and PPP Loans Initially, businesses could not claim the ERTC if they received a PPP loan. However, this rule was changed in December 2020, allowing businesses to qualify for the ERTC even if they received a PPP loan. It is essential to note that businesses cannot claim the ERTC for wages paid with PPP loan funds.
ERTC for New Businesses
The ERTC now includes recovery startup businesses, which are newly established businesses that began operations after February 15, 2020, and have less than $1 million in average revenue over the last three years. These businesses do not need to show a decline in revenue or a suspension of operations to qualify for the credit. Recovery startups can claim the ERTC for the last quarter of 2021, and they are the only businesses eligible for this quarter.
Key Takeaways
The Employee Retention Tax Credit is a significant financial relief opportunity for businesses affected by the COVID-19 pandemic. Although the credit was discontinued at the end of 2021, employers can still file for the period of March 2020 to September 2021. It is crucial for businesses to understand the eligibility criteria, the claiming process, and the potential penalties associated with incorrect claims. Consulting with a tax professional or accountant can help businesses navigate the complexities of the ERTC and ensure they claim the maximum credit available to them
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