ERTC, or the Employee Retention Tax Credit, was introduced to encourage businesses to retain their employees during the pandemic. While the official program has ended, businesses can still retroactively claim the Employee Retention Tax Credit. Employers have a three-year window from September 30, 2021, to determine if they qualify for this tax credit for qualified employee wages paid after March 12, 2020.
Understanding ERTC is essential for businesses looking to take advantage of this program. In this article, we’ll delve into what ERTC is, how it’s calculated, who is eligible, and the process for claiming the credit retroactively. By the end, you’ll have a clear grasp of whether your business qualifies for the Employee Retention Tax Credit and how to secure the much-needed relief.
What is ERTC?
The Employee Retention Tax Credit is a fully refundable payroll tax credit designed for companies that either partially or fully suspended their operations due to COVID-19 or experienced a significant decline in gross receipts compared to 2019. This credit enables employers to offset federal payroll taxes, including federal wage withholding, the employee’s share of Social Security, and Medicare taxes.
Even if employers received Paycheck Protection Program (PPP) loans, they may still be eligible for ERTC with regard to wages not paid for with forgiven PPP proceeds. Following IRS guidelines that suggest nonprofits and other employers maximize qualified non-payroll expenses when applying for PPP loan forgiveness is crucial to ensure that excess payroll expenses can generate the maximum ERTC.
How Does the Employee Retention Tax Credit Work?
The Employee Retention Tax Credit operates differently across three key legislative acts:
CARES Act 2020: Employers who qualify can claim a credit against 50% of qualified wages, up to $10,000 per employee annually, for wages paid between March 13 and December 31, 2020.
Consolidated Appropriations Act of 2021: Qualifying employers, including PPP loan recipients, can claim a credit against 70% of wages paid. The amount of qualified wages increased to $10,000 per employee per quarter for the first two quarters of 2021.
American Rescue Plan Act of 2021: The maximum credit remains up to 70% of qualified wages, up to $10,000 per quarter. Employers can claim $7,000 per quarter per employee until September 30, 2021. The Recovery Startup Business provision extends ERTC eligibility through December 31, 2021, allowing startup businesses to claim up to $50,000 for the third and fourth quarters of 2021.
ERTC Qualifications for Eligibility
Before claiming the Employee Retention Tax Credit, you must determine your eligibility. Initially, businesses could only claim the credit if they were fully or partially suspended by a lockdown order or if their gross receipts in any 2020 quarter were less than 50% of the gross receipts for the same quarter in 2019.
However, the American Rescue Plan Act of 2021 has made it easier to qualify. You now need to demonstrate a decline in gross receipts of more than 20% for the same 2019 quarter to be eligible. Specific rules can even allow your business to claim the credit if you weren’t in existence for all or part of 2019 and are a recovery startup business. These provisions apply to businesses that opened after February 15, 2020, with average annual gross receipts not exceeding $1 million. Startup companies meeting these criteria can claim the credit, even without satisfying the significant decline in gross receipts or suspension of operations test, with a cap of $50,000 per employer.
Claiming the Employee Retention Tax Credit Retroactively
Eligible businesses that meet ERTC qualifications can file a retroactive refund claim for previously paid qualified wages from past calendar quarters. To do this, you’ll need to prepare and submit Form 941X, the Adjusted Employer’s Quarterly Federal Tax Return. The deadline for filing this form for 2020 941 payroll tax filings is April 15, 2024, and for 2021 941 payroll tax filings, it’s April 15, 2025.
The Employee Retention Tax Credit program has evolved over time to encompass a wider range of eligible businesses. While this expansion is beneficial, understanding ERTC eligibility and the credit-claiming process can be complex. Before attempting it independently, consider working with your accountant or payroll provider to determine your eligibility and maximize your relief under the program.