In March 2020, Congress created the Employee Retention Tax Credit (ERTC) as a way to provide small businesses with financial relief during the pandemic. Since that time, the ERTC has been expanded twice so more struggling companies can use it to cut down their federal tax bill.
Eligible employers can claim the ERTC retroactively by filing Form 941-X for each quarter they paid qualifying wages. They can file this form up to three years after the original payroll taxes were due. This means that employers can claim the 2020 ERTC until April 15, 2024, and the 2021 ERTC until April 15, 2025. Here’s what you need to know about the ERTC and how to take advantage of it.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a credit that provides tax relief for companies that lost revenue in 2020 and 2021 due to COVID-19. The ERTC was designed to incentivize businesses of all sizes to keep employees on their payrolls during this period of economic hardship. Eligible companies can receive as much as $7,000 per employee per quarter for the first three quarters in 2021, which equals $21,000 per employee potentially coming back to your company. They might also qualify for a break of $5,000 per employee for all of 2020.
The ERTC has changed over time, so it can be a little confusing to track where things stand today. When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in March 2020, it included the ERTC as an option for financial relief for businesses. But companies could only take a forgivable Paycheck Protection Program (PPP) loan or the ERTC in the original bill, which meant only a handful of them actually could use the credit.
Congress then amended the ERTC 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), so more companies could take advantage of the credit. If you meet the eligibility criteria for the ERC tax credit, you can still claim it within a certain time frame. The claim period allows for up to three years after filing your tax return or up to two years after making the payment, whichever occurs later.
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If you meet the eligibility criteria for the ERC tax credit, you can still claim it within a certain time frame.
What companies qualify for the ERTC?
The ERTC was designed to help small businesses that lost revenue due to the pandemic, but only some companies are eligible. To qualify, private companies (including nonprofits) must meet one of the following criteria:
- Your business was ordered by a local government to fully or partially shut down in 2020 or 2021.
- Your gross receipts for a single quarter of 2020 fell by 50% versus the same quarter of 2019 (for the 2020 tax credit).
- Your gross receipts for a single quarter of 2021 decreased by 20% versus the same quarter of 2019 (for the 2021 tax credit).
If your company was not in business in 2019, you could use a corresponding quarter in 2020 to show you had a revenue reduction between 2020 and 2021 and qualify for the ERTC.
Notably, government entities and sole proprietors are not eligible for the ERTC. If a self-employed person has staff on payroll, however, they may qualify for the ERTC for wages paid to the other employees.
Which employees count toward eligibility?
For companies with 100 or fewer full-time employees, all of those employees — regardless of whether they are providing service during the designated period — count toward eligibility. For companies with over 100 employees, only full-time employees who are being paid but not providing service due to shutdowns and/or a reduction in gross receipts count.
Employers may not claim the same employee for the ERTC credit and the Work Opportunity Tax Credit for the same period, nor may they claim the same wages under ERTC and the employer credit in section 45S for the Family and Medical Leave Act (FMLA).
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How to calculate the size of your ERTC
Eligible companies can claim a refundable credit against what they typically pay in Social Security tax on up to 70% of the “qualified wages” paid out to employees. As of January 2021, qualified wages for employers with fewer than 500 employees are those paid to all full-time employees during which there was a full or partial shutdown or a quarter that had a decline in gross receipts. For employers with more than 500 employees, qualified wages only refer to those paid to employees who were not providing services during that same time period. These qualified wages are limited to $10,000 per employee per quarter in 2021; therefore, the maximum ERTC available is 70% of $10,000, or $7,000 per employee per quarter.
For example, if you are a restaurant that had a 20% reduction in gross receipts in Q1 2021 versus Q1 2019, you can then request a tax credit of up to $7,000 per employee for the first quarter of the year. If that trend continued through the rest of the year and you have lower gross receipts, you could potentially claim the ERTC for Q1 through Q3 of 2021. For a restaurant with 30 employees, for example, the credit could be worth as much as $630,000 in 2021.
Guidelines for new businesses
The ERTC now includes recovery start-up 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. Unlike other businesses, recovery start-ups do not need to show a decline in revenue or a suspension of operations to qualify for the credit. Recovery start-ups can claim the credit for the last quarter of 2021, and they are the only businesses eligible for this quarter.
ERTC and PPP can be applied to the same payroll
One of the most significant changes Congress made to the ERTC in late 2020 was allowing employers who took first- and second-draw PPP loans to also use the ERTC. The ERTC was initially not available to businesses that received a PPP loan, but this rule was later changed. Businesses can now qualify for the ERTC even if they received a PPP loan, but they cannot claim the credit against wages paid with PPP loan funds.
How to claim the ERTC
Companies looking to claim the ERTC must report their total qualified wages, as well as the related health insurance costs, on their quarterly tax returns (Form 941 for most employers). This refundable credit will be taken against the employer’s share of Social Security tax.
Ahead of receiving the credit, employers may opt to retain the value of employment taxes up to the amount of the ERTC, rather than depositing it, without penalty. Eligible employers that have fewer than 500 full-time employees can also request advance payment of the ERTC using IRS Form 7200. Employers with more than 500 employees are not able to receive an advanceable ERTC.
Though the ERTC ended on October 1, 2021, businesses can still file for a retroactive ERTC refund by Form 941-X. This form can be used to adjust employment taxes filed within three years of the original return or two years from the date the employer paid the tax. Therefore, eligible companies that did not initially claim their ERTC could potentially do so through 2024, depending on when they originally filed or paid their business taxes. Employers should keep in mind that this retroactive refund is only available for the 2020 tax year as well as the first three quarters of the 2021 tax year; the eligibility criteria does not apply for Q4 of 2021 nor the 2022 tax year and beyond.
Talk with your accountant or payroll preparer about ERTC
While the ERTC is a great tool to help struggling businesses reduce their tax burden, it is still a tad complicated to take advantage of it. If you believe your company is eligible, you should immediately speak with your accountant and potentially your payroll preparer. Because the credit size depends on how much you normally pay in Social Security taxes, both your accountant and payroll company can help you determine how much your credit is worth and how much tax should not be paid to the federal government. A financial professional can also help make sure you don’t apply the same payroll for both PPP loan forgiveness and the ERTC.
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