Even though the Employee Retention Tax Credit (ERTC) is set to expire at the end of 2021, there is still time for eligible businesses to claim the credit. President Biden is encouraging eligible businesses to take advantage of this refundable tax credit now to help rehire and retain workers as well as reinvest and ramp up operations. Signed into law in March 2021, the American Rescue Plan Act (ARPA) expanded the credit making more businesses eligible than before and allowing them to claim ERTC through the end of 2021.
On August 4, the IRS issued new guidance in Notice 2021-49 that clarifies changes to the ERTC made by ARPA. Some of those changes include making the credit available to eligible employers that pay qualified wages after June 30, 2021, and before January 1, 2022 and expanding the definition of eligible employer to include “recovery startup businesses.”
The Employee Retention Tax Credit has the potential to be a large source of financial relief for eligible businesses. In this article, we’ll focus on how an eligible business can claim the employee retention tax credit—including eligibility dates, forms you need to file, and what to expect in terms of payroll tax reductions and potential refund timelines.
What is an Employee Retention Credit?
The ERTC (also abbreviated as ERC) is a credit that provides tax relief for companies that lost revenue in 2020 and 2021 due to the COVID-19 pandemic. Eligible businesses can get a refundable payroll tax credit equal to a percentage of eligible wages per employee. In 2020, the credit was worth 50% of the first $10,000 of wages and healthcare benefits paid to each employee. In 2021, employers can claim 70% of the first $10,000 is qualified wages for each employee in every quarter.
When will the ERTC program end?
The ARPA extended the ERTC to tax year 2021, so wages paid from January 1, 2021 through December 31, 2021 are eligible for an expanded credit. However, there is the potential that new legislation could end the program early. According to Accounting Today, “the bipartisan infrastructure bill that the Senate is taking up this week proposes to end the tax credit in September as a way to help pay for an estimated $8.2 billion of the $550 billion plan. Lawmakers contend the program hasn’t been used by enough businesses to justify keeping it for the rest of the year.”
When are filing deadlines for eligible businesses?
The ERTC is available to businesses in two tax years: 2020 and 2021. Even if your business already filed returns for 2020, you can file an amended Form 941-X return to claim the credit retroactively.
As it stands under ARPA, if not revised by other legislation, The final dates for eligible businesses to claim the ERTC is with their quarterly Form 941 tax filings, so filing deadlines will be October 31, and December 31, 2021. You’ll also need additional payroll data and other paperwork to file for the ERTC with these quarterly returns. If you’re eligible and didn’t claim the credit in the first two quarterly filings, you can also file amended Form 941-X.
If the reduction in payroll tax deposits does not cover the amount of your credit, certain employers may file Form 7200 to receive an advance payment from the IRS.
If your business isn’t sure about eligibility status, or needs help preparing the necessary Forms 941, 941-X, or 7200, it’s important to partner with a tax advisor or business solutions provider to ensure you remain compliant
How much relief could a business obtain in 2021?
In 2021, eligible employers with 500 or fewer employees can claim 70% of the first $10,000 in qualified wages for each employee in every quarter. It is a refundable, advanceable credit that will cover up to $7,000 in wages per quarter or $28,000 per year for each employee.
Many payroll solutions offer an automatic calculation that shows businesses their tax liability less any amount they don’t have to deposit when they claim the credit. Essentially, businesses can reduce their payroll deposit requirement to almost zero in some cases and even to negative numbers. In the latter case, the business then qualifies for a refund if the credit is more than they would owe in employment taxes.
A May 2021 White House Fact Sheet provided the following real-world example of how much money the ERTC can save businesses:
“A small independent retailer in Milwaukee, Wisconsin with 25 employees has $130,000 in payroll expenses per quarter (all for employees earning less than $10,000 in the quarter), and experiences a 25 percent decline in gross receipts in the first quarter of 2021 compared to the first quarter of 2019. The retailer is eligible for the Employee Retention Credit in the first quarter since it experienced a greater than 20 percent decline in gross receipts. The retailer is also eligible for the ERC in the second quarter because of the decline as compared to 2019 in the immediately preceding first quarter. The retailer can claim a tax credit of $91,000 in both the first and second quarters (for a total of $182,000). The amount of the tax credit would be applied against the retailer’s quarterly federal payroll tax amount, and then, assuming that the $91,000 was in excess of the total liability for the quarter, the excess would be advanced (or paid by the government directly to the retailer). If the retailer experienced declines in gross receipts in the third quarter as compared to 2019, it could claim an additional tax credit (in a similar amount) for the third quarter and the fourth quarter. The small retail business could use this advance – which could amount to tens of thousands of dollars – to rehire workers, raise wages, improve facilities, and purchase new inventory.”
How quickly can my business expect to receive ERTC advance payments?
The IRS is currently experiencing a backlog in processing 941-X returns, so busine
sses may have to wait up to 120 days to receive any retroactive payments from the IRS. When filing an original 941 return, the turnaround is 30 to 60 days.
Get assistance from Asure’s ERTC filing service
Small businesses should be thinking about how to take advantage of these pandemic relief programs before they run out. Do you think your business is an eligible employer? Do you know how to claim the ERTC? What about guidance from the IRS? Watch our webinar and find out what your business needs to know about ERTC eligibility so you remain compliant when taking advantage of pandemic relief available to you.