The Employee Retention Tax Credit (ERTC) was created as part of the CARES Act to encourage businesses to continue paying employees by providing a credit to the eligible employer for wages paid to eligible employees. The refundable credit is available from March 13, 2020 through September 30, 2021, and can be utilized even if companies received PPP loans.
Who is Eligible for Employee Retention Tax Credit?
Employer qualification for the ERTC is determined by one of the following criteria — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
- Have had their operations fully or partially suspended, or had to reduce business hours due to orders from a governmental authority.
- Suffer a significant decline in quarterly gross revenue as measured against 2019.
- 50% decline for 2020 compared to 2019
- 20% decline for 2021 compared to 2019
- Recovery Startup Business – 3rd and 4th quarter 2021 only.
- Have begun carrying on trade or business after Feb. 15, 2020
- Have annual gross receipts that do not exceed $1 million
- Not be eligible for the ERTC under the other two categories
How is Employee Retention Tax Credit (ERTC) Calculated?
2020 ERTC Calculation
- The 2020 credit is computed at a rate of 50% of qualified wages paid, up to $10,000 per eligible employee in wages and healthcare, for the year.
- For 2020, there is a maximum credit of $5,000 per eligible employee, per year.
- For eligible employers with less than 100 average full-time employees in 2019, the credit is available for all employees receiving wages in 2020.
2021 ERTC Calculation
- The 2021 credit is computed at a rate of 70% of qualified wages paid, up to $10,000 per eligible employee in wages and healthcare, per quarter.
- For 2021, there is a maximum credit of $7,000 per eligible employee, per quarter.
- The maximum credit for 2021 is $21,000 per employee for the first 3 quarters of the year.
- For Eligible Employers with less than 500 average full-time employees in 2019, the credit is available for all employees receiving wages in 2021.
Can I Still Receive the ERTC if I Claimed a PPP Loan?
A common misconception is that PPP borrowers are ineligible for the ERTC, but this is not true. As long as your company meets eligibility requirements you can receive both the PPP and the ERTC. Both claims can be filed retroactively even if you missed the original filing deadline.
What Are the Date Ranges Considered for Determining Eligible Wages under the ERTC?
- March 13, 2020 – December 31, 2020 – CARES Act
- January 1, 2021 – June 30, 2021 – Consolidated Appropriations Act
- July 1, 2021 – September 30, 2021 – American Rescue Plan Act
- July 1, 2021 – December 31, 2021 – Recovery Startup Business
Is there an Employee Limit to Meet ERTC Eligibility?
- For 2020 credits, an eligible employer is deemed to be a small employer if they have 100 or fewer average full-time employees.
- For 2021 credits, an eligible employer is deemed to be a small employer if they have 500 or fewer average full-time employees.
Do I Have to Pay Back the Employee Retention Tax Credit (ERTC)?
No, the employee retention credit is a fully refundable tax credit for employers and it does not need to be paid back. The ERTC is a permanent refund for you to keep.
When is the Employee Retention Tax Credit (ERTC) Filing Deadline?
A business can claim the Employee Retention Tax Credit (ERTC) retroactively. The statute for payroll taxes begins to run on April 15 of the year following the calendar year when the calendar quarter ends, and goes for three years. So that would give you until April 15, 2024 for 2020 ERTC claims, and April 15, 2025 for 2021 ERTC claims.
Which Organizations Are Considered a “Recovery Startup Business?”
- Began operations after February 15, 2020.
- Eligible wages extended through December 31, 2021
- Average annual gross receipts are under $1 million.
- Your total credit is limited to $50,000 per calendar quarter.
Is the ERTC Credit Taxable?
No. Federal income tax laws do not require employers to include the tax credit they receive for qualified wages, including their allocable qualified health plan expenses, in their gross income.
How Does the ERTC Work if You’re a Single-Employee Business?
If you were self-employed, then you are not eligible for the 2020 ERTC for your own wages. But if you employed one employee, then you may qualify for the ERTC on wages paid to that employee.
Are Tipped Wages Included in Qualified Wages?
The IRS clarified that tips would be included in qualified wages if these wages were subject to FICA. This means that if tips are over $20 in a calendar month for an employee, then all tips would be included in qualified wages for the purpose of the retention credit.
What Would Disqualify Me from Receiving the ERTC?
The credit is available to all employers, regardless of size, including tax-exempt organizations. There are only two exceptions:
- State and local government employers
- Self-employed individuals
Employee Retention Tax Credit Example Calculations:
2020 employee retention credit example:
You pay Mary $8,000 wages and healthcare in quarter 2, $6,000 in quarter 3, and $6,000 in quarter 4 of 2020. Your credit amount for Mary is $4,000 in Q2, $1,000 in Q3, and $0 in Q4. Once you hit the $5,000 cap, any additional wages you pay Mary in 2020 will not increase your credit amount.
2021 employee retention credit example:
You pay Kevin $8,000 in the first quarter, $10,000 in the second quarter, $12,000 in the third quarter, and $12,000 in the fourth quarter of 2021. The credit amount available to you is $5,600 for Q1, $7,000 for Q2, $7,000 for Q3, and $0 for Q4. Remember that the tax credit amount is capped at $7,000 per quarter, and the 4th quarter wages do not qualify for the credit.
Common Misconceptions about The ERTC:
- The business has to have had a revenue decline: No, revenue is only one factor – many companies qualify for employee retention credit with little to no revenue decline.
- The business must be deemed essential: No, essential status has no impact on ERTC, and many essential companies qualify.
- The company has received a paycheck protection program (PPP) loan, so it can’t claim the credit: Not true. Companies that received PPP funds are also eligible for Employee Retention Tax Credit.
- The business did not shut down, so it doesn’t qualify: Not true. Partial business shutdowns and disruptions are also eligible for ERTC claims.
Which IRS Forms Are Used to File the Employee Retention Credit (ERTC)?
- IRS Form 7200 – This form was used to claim an advance payment of employee retention credit up until January 31, 2022. This form now remains only as a historical item.
- IRS Form 941 – This form is used to file quarterly federal tax returns, including the employee retention tax credit claims.
- IRS Form 941-X – This form is used to correct errors on a previously filed Form 941. This form can be used to claim employee retention tax credit retroactively.
Additional Tax Credits You May Qualify For:
Regardless of whether you qualify for the Employee Retention Tax Credit (ERTC), you may still qualify for the Emergency Sick and Family Leave Tax Credit. If your employees took sick leave for themselves or to care for others due to COVID-19 in 2020 or 2021, you may qualify for the Emergency Sick Leave Tax Credit. You may be eligible if:
- You paid sick leave wages to employees between April 1, 2020, and September 30, 2021
- You paid sick leave wages to employees who took time off to care for others between April 1, 2020, and September 30, 2021
What Expenses Qualify for the Emergency Sick Leave Tax Credit?
- Family leave wages paid between April 1, 2020, and December 31, 2020
- Qualified sick leave health plan expenses and the employer’s share of Medicare tax allocable to family leave wages paid between April 1, 2020, and December 31, 2020
- Family leave wages paid between January 1, 2021, and September 30, 2021
- Qualified sick leave health plan expenses and the employer’s share of Medicare tax allocable to family leave wages paid between January 1, 2021, and September 30, 2021
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Reduce Risk By Letting Us Work through the Guidelines with You
We have successfully claimed the ERTC for numerous firms, obtaining millions of dollars in tax credits. We can help you find out if you qualify and then manage the tax credit process for you. Let us provide a complimentary analysis of your organization to determine if the ERTC credits can be claimed. Our comprehensive ERTC study includes:
- Determination if the employer qualifies, and if so, for which fiscal quarters.
- Determination of which employee wages qualify;
- Detailed summary and supporting evidence of the client’s business to identify partially or fully suspended conditions due to COVID-related government orders.
- Preparation of documentation supporting ERTC eligibility claims, including financial review of 2019, 2020 & 2021 gross income receipts to determine if the business experienced the significant decline in revenue that meets the ERTC requirements;
- Determination of the fiscal quarters that qualify for the ERTC, which includes analyzing whether the business was shut down, in full or in part, by an order issued by a government agency, and/or, by reviewing Form 941s, and employer’s quarterly federal tax return.
- Qualifying wage computations take into account the use of PPP funds for payment of employee wages, in order to optimize the number of wages qualifying for the employee retention tax credit (ERTC) while preserving PPP forgiveness.
- Preparation of reconciled data for IRS Form 941-X;
- Completion of all federal tax forms and additional supporting documentation, as required.
- Removing unqualified employees, such as certain business owners;
- Reviewing and adding allocable qualified health plan expenses;
- Checking to see if the business qualifies for any additional tax credits in addition to the ERTC.
- Providing detailed filing instructions as well as audit support if the project is challenged by the IRS.
- You apply online. Simply fill out an online form and get a no risk, no obligation tax credit refund estimate.
- We calculate your ERTC. Our team of experienced accountants will determine your maximum credit amount eligibility.
- We file for you. Our team of experts will complete all the necessary IRS tax forms and provide supporting documentation.
- You receive your refund. Receive your tax refund directly from the IRS, with minimal involvement needed from yourself.