The Employee Retention Tax Credit (ERTC) is a tax credit created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act. You will also see this referred to as the Employee Retention Credit or ERC. No matter what you call it, the purpose of the tax credit was to help companies survive and keep more employees on the payroll through the pandemic. While the final date you can use for calculating the tax credit has passed, you actually still have plenty of time to claim the credit.
Here is what you need to know to take advantage of the employee tax credit, including why it’s worth looking into even if you previously thought you weren’t eligible.
Employee Retention Credit
Determining if your company is eligible for the tax credit is not complicated but calculating the amount of the credit can be. It can also be time consuming and frustrating since you have to gather a good deal of information to even start the process. However, this valuable tax credit can be worth a lot of money which is especially helpful for companies hit hard by COVID-19. This makes the Employee Retention Tax Credit worth the time and trouble it takes to claim.
Tax credit time limits
The end date for the tax credit program was moved several times due to IRS guidance and additional pieces of legislation. The final change came in November of last year when the Infrastructure Investment and Jobs Act was signed, giving the ERC program a retroactive end date of September 30, 2021. However, this is just the last day used to determine eligibility and calculate the tax credit. You still have a few years to actually claim the employee retention credit.
The law allows companies a period of time to file corrected quarterly tax returns using Form 941-X:
-3 years from date of original Form 941 filing
-2 years from date taxes reported on Form 941 were paid
During this time frame companies can take still advantage of the tax credit by simply calculating it, filing corrected quarterly returns, and reducing their tax deposits accordingly.
Employee Retention Credit eligibility
Companies that fall into one of the following groups during 2020 and/or 2021 are most likely eligible to claim the tax credit:
- You experienced a full or partial suspension of operations because government orders related to COVID-19 resulted in reduced commerce. In this case, the tax credit applies only to the period of time the suspension was experienced.
- You experienced a significant decline in gross receipts during the calendar quarter. For the purposes of the tax credit, “significant decline” is defined as a 20% reduction of revenue as compared to the same quarter in 2019.
You only have to be able to demonstrate that you experienced one of these conditions to be eligible. So if you did not see a full 20% reduction in revenue but did have to suspend normal operations due to a government order, you can claim the tax credit. Keep in mind that any restrictions that affected how you do business may count as a partial or full suspension as long as they were imposed by a government authority. This means that if you had to do things like close your storefront, move to online, take-out or delivery, or restrict capacity to comply with local ordinances, you’re eligible.
Special eligibility situations
Companies of any size can qualify as long as they otherwise meet the eligibility criteria. Non-profits can also qualify if they are otherwise eligible. There are some companies and organizations, however, that cannot claim the Employee Retention Tax Credit:
- Governmental employers are not eligible.
- Organizations created by or pursuant to state law and operated for public purposes are not eligible.
- People that are self-employed are not eligible for their own self-employment earnings but may be able to claim the tax credit for wages paid to employees.
Tribal government and tribal entities are actually eligible to claim the tax credit as long as they otherwise meet the criteria for eligibility. Companies that received a Paycheck Protection Program (PPP) loan may be eligible even if they received loan forgiveness but cannot claim the credit against wages used for loan forgiveness.
Employee Retention Credit amounts
2020 and 2021 are treated differently when it comes to determining the tax credit per employee and the maximum credit allowed. For this reason, you have to look at every quarter in relation to the rules for that year’s tax credit in order to calculate the tax credit correctly.
2020: The tax credit for 2020 is equal to 50% of up to $10,000 in qualified wages and some health care plan costs, paid to employees from March 12th through the end of the year. The maximum tax credit is $5,000 per employee for all of 2020.
2021: The tax credit for 2021 is 70% of up to $10,000 of qualified wages per quarter and some health care plan costs, paid to employees from January 1, 2021, through November 30, 2021. The maximum tax credit is $7,000 per employee, per quarter.
For the purposes of the tax credit, qualified wages are wages subject to Federal unemployment taxes, and health insurance benefits paid by the employer on behalf of qualified employees.
Calculating your tax credit can be a bit time consuming and complicated. It will help if you gather the following information before you begin:
- Quarterly payroll tax returns and revenue summaries for all eligible quarters
- Employee wage details during eligible quarters
- Summary of lines of business, services and/or products
- Information on wages used to qualify for the Paycheck Protection Program
- Forgiveness details if applicable
Should I bother with the tax credit?
There is plenty of potential money on the table, but you may be wondering if it is worth the time and trouble. Not only do you have to calculate it correctly, but you also have to file amended returns and deal with the IRS. The reality is that many companies can reclaim a significant amount of money, so it really is worth the effort it takes.
Here is an example of what a 10-employee company may expect:
A 10-employee company that was eligible all of 2020 and the first two quarters of 2021 can receive $19,000 per employee, totaling $190,000 in ERC.
Of course, every company is different, but this shows that tax credit can really add up even for small companies. If you are interested in seeing if you’re company is eligible but aren’t sure you want to deal with the calculations and IRS, you have options. You can either reach out to your tax advisor or use an independent company that is set up to handle the Employee Retention Tax Credit on your behalf. Just be sure that whomever you use has plenty of experience handling tax issues so that you can be confident in their numbers and the process.
If you’re ready to look into the tax credit for your business, use this ERC eligibility wizard to see if you may qualify.
The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.