Employee Retention Tax Credit Explained
The Employee Retention Tax Credit (ERTC) is a refundable tax credit for businesses that paid employees during the COVID-19 pandemic or had significant declines in their gross receipts. It is a tax-saving strategy that businesses can take advantage of to help them navigate the financial difficulties caused by the pandemic.
Importance of the ERTC
The COVID-19 pandemic has had a significant impact on businesses worldwide, affecting their operations, revenue, and workforce. The ERTC is a tax credit that businesses can claim on their tax returns to help them retain their employees and keep their businesses running. It can provide a significant financial benefit to eligible businesses, which makes it an essential tax-saving strategy during these challenging times.
The ERTC can provide a refundable payroll tax credit of up to $5,000 per employee in 2020 and up to $21,000 per employee in 2021. This means that if the credit exceeds the employer's payroll tax liability, the IRS will refund the difference to the employer. Eligible employers can claim the ERTC on qualified wages paid to their employees between March 13, 2020, and December 31, 2021. However, it is essential to note that the ERTC cannot be claimed on wages forgiven under the Paycheck Protection Program (PPP).
Eligibility for the ERTC
To be eligible for the ERTC, employers must meet specific criteria. Eligible employers include those that experienced a partial or full suspension of their operations due to a government order limiting commerce, travel, or group meetings. Businesses that experienced a significant decline in their gross receipts are also eligible for the credit.
According to CBH, eligible employers must have experienced a significant decline in gross receipts. In 2020, the decline must have been 50% or more compared to the same quarter in 2019. In 2021, the decline must have been 20% or more compared to the same quarter in 2019. Alternatively, businesses that were not in operation for the same quarter in 2019 can compare their gross receipts to the same quarter in 2020 to determine their eligibility.
Qualifying Wages and Credit Amount
The ERTC can be claimed on qualified wages paid to eligible employees. The credit amount varies depending on the year and number of employees. According to Paychex, the credit can be claimed against 50% or 70% of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and December 31, 2020, and up to $10,000 per employee per quarter in 2021.
For example, if a business had 100 employees and paid each employee $10,000 in qualified wages between March 13 and December 31, 2021, the maximum credit that the business could claim would be $700,000 (100 employees x $7,000 credit per employee). However, if the business had only 50 employees, the maximum credit that it could claim would be $350,000 (50 employees x $7,000 credit per employee).
Overall, the ERTC is a valuable tax-saving strategy that can help businesses retain their employees and navigate the financial difficulties caused by the COVID-19 pandemic. In the next section, we will discuss how businesses can claim the ERTC on their tax returns.
Eligibility for the ERTC
To claim the ERTC, businesses must meet specific criteria. In this section, we will discuss the eligibility requirements for the ERTC in detail.
Eligible Employers
According to the IRS, eligible employers include those that experienced a partial or full suspension of their operations due to a government order limiting commerce, travel, or group meetings. Alternatively, businesses that experienced a significant decline in their gross receipts are also eligible for the credit.
Significant Decline in Gross Receipts
To be eligible for the ERTC, businesses must have experienced a significant decline in their gross receipts. According to CBH, the decline must have been 50% or more compared to the same quarter in 2019 for 2020. In 2021, the decline must have been 20% or more compared to the same quarter in 2019. Alternatively, businesses that were not in operation for the same quarter in 2019 can compare their gross receipts to the same quarter in 2020 to determine their eligibility.
Qualifying Wages
The ERTC can be claimed on qualified wages paid to eligible employees. According to Paychex, qualified wages are wages paid to employees between March 13, 2020, and December 31, 2021. The wages must be paid to an employee who is not an owner or related to the owner of the business.
Credit Amount
The credit amount varies depending on the year and number of employees. According to CBH, in 2020, the maximum credit was $5,000 per employee, and in 2021, the maximum credit is $7,000 per employee per quarter. The credit can be claimed against 50% or 70% of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and December 31, 2020, and up to $10,000 per employee per quarter in 2021.
Double-Dipping for Tax Credits
It is important to note that businesses cannot double-dip for tax credits. This means that businesses that received PPP loans cannot claim the ERTC on the same wages used to calculate the PPP loan forgiveness. Businesses must work with their accountant and payroll specialist to ensure that they are not double-dipping for credits.
Penalty Relief
The IRS understands that some businesses may have claimed the ERTC without meeting the eligibility requirements. To provide some relief for these businesses, the IRS has announced penalty relief for claims related to the ERTC. Eligible employers can claim penalty relief by filing Form 843, Claim for Refund and Request for Abatement.
In the next section, we will discuss how businesses can claim the ERTC on their tax returns.
How to Claim the ERTC
To claim the ERTC, businesses must file Form 941, Employer's Quarterly Federal Tax Return. In this section, we will discuss how businesses can claim the ERTC on their tax returns.
Retroactive Claim
Businesses can retroactively claim the ERTC until 2024 or 2025 by conducting a lookback on their payroll during the pandemic and filing an amended tax return. According to Paychex, businesses can claim the credit on qualified wages paid after March 12, 2020, through the end of the program. This means that businesses can claim the credit for qualified wages paid in 2020 and 2021.
Recovery Startup Businesses
Recovery startup businesses can claim the ERTC in Q4 2021 for the period March 2020 through December 2021. According to the IRS, a recovery startup business is a business that began operating after February 15, 2020, and has an annual gross receipt of $1,000,000 or less.
Amended Tax Return
To claim the ERTC retroactively, businesses must file an amended tax return. According to Paychex, businesses can file Form 941X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to claim the credit retroactively. Businesses must file a separate Form 941X for each quarter that they are claiming the credit.
Payroll Provider
Businesses can work with their payroll provider to claim the ERTC. According to CBH, payroll providers can file Form 941 on behalf of businesses. If a business already filed Form 941 and did not claim the ERTC, the payroll provider can file an amended Form 941X on behalf of the business.
Consult with an Accountant
It is essential to consult with an accountant or tax professional to determine eligibility and claim the ERTC. According to Paychex, businesses should work with their accountant or tax professional to ensure that they are claiming the credit correctly.
In the next section, we will discuss some of the common questions and misconceptions about the ERTC.
Common Questions and Misconceptions About the ERTC
In this section, we will address some of the common questions and misconceptions about the ERTC.
Can Businesses Claim the ERTC and PPP Loan at the Same Time?
Businesses cannot claim the ERTC and PPP loan at the same time for the same wages. According to Paychex, businesses that received a PPP loan can claim the ERTC on wages that were not used to calculate the PPP loan forgiveness. However, businesses cannot claim the ERTC on the same wages used to calculate the PPP loan forgiveness.
Does the ERTC Apply to Self-Employed Individuals?
Self-employed individuals cannot claim the ERTC for themselves. According to Investopedia, the credit applies only to wages paid to employees by eligible employers.
Can Businesses Claim the ERTC for Employees on Leave?
Businesses can claim the ERTC for employees on leave if the employees are still on the payroll. According to CBH, businesses can claim the ERTC for employees who are on leave, including sick leave, family leave, and other leave. However, the credit cannot be claimed for wages paid to employees who are not on the payroll.
Does the ERTC Apply to Non-Profit Organizations?
Non-profit organizations can claim the ERTC if they meet the eligibility requirements. According to CBH, non-profit organizations are eligible for the ERTC if they experienced a partial or full suspension of their operations due to a government order limiting commerce, travel, or group meetings. Alternatively, non-profit organizations that experienced a significant decline in their gross receipts are also eligible for the credit.
Can the ERTC be Claimed on Bonuses and Hazard Pay?
The ERTC can be claimed on bonuses and hazard pay if they are included in the qualified wages. According to Paychex, bonuses and hazard pay can be included in the qualified wages if they are paid during the eligible period and meet other eligibility requirements.
In the next section, we will discuss some of the pros and cons of claiming the ERTC.
Pros and Cons of Claiming the ERTC
In this section, we will discuss some of the pros and cons of claiming the ERTC.
Pros
Helps Businesses to Keep Employees on Payroll
The ERTC helps businesses keep employees on payroll during the pandemic. According to the IRS, the credit provides a significant financial incentive to businesses to keep employees on payroll.
Refundable Tax Credit
The ERTC is a refundable tax credit, which means that businesses can receive a refund for the credit amount that exceeds their payroll taxes. According to CBH, the credit is refundable up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for 2021.
Retroactive Claim
Businesses can retroactively claim the ERTC for 2020 and 2021, which can provide a significant financial benefit. According to Investopedia, businesses can conduct a lookback on their payroll during the pandemic and file an amended tax return to claim the credit retroactively.
Cons
Complexity
The ERTC can be complex, and businesses may need to work with their accountant or tax professional to ensure that they are claiming the credit correctly. According to Paychex, businesses should be cautious of third-party advice and work with their accountant or tax professional to ensure that they are claiming the credit correctly.
Eligibility Requirements
The ERTC has strict eligibility requirements, and not all businesses may qualify for the credit. According to the IRS, businesses must have experienced a significant decline in gross receipts or a partial or full suspension of their operations due to a government order.
Cannot Double Dip
Businesses cannot claim the ERTC and PPP loan at the same time for the same wages. According to Paychex, businesses that received a PPP loan can claim the ERTC on wages that were not used to calculate the PPP loan forgiveness. However, businesses cannot claim the ERTC on the same wages used to calculate the PPP loan forgiveness.
In the next section, we will discuss some tips for businesses to maximize the ERTC.
Tips for Maximizing the ERTC
In this section, we will discuss some tips for businesses to maximize the ERTC.
Review Payroll Records
Businesses should review their payroll records to determine the number of employees and wages paid during the eligible period. According to CBH, businesses must maintain documentation to support their claim for the credit.
Claim the Credit on Amended Tax Returns
Businesses can claim the ERTC on amended tax returns for 2020 and 2021. According to Investopedia, businesses can conduct a lookback on their payroll during the pandemic and file an amended tax return to claim the credit retroactively.
Work with Accountant or Payroll Specialist
The ERTC can be complex, and businesses should work with their accountant or payroll specialist to ensure that they are claiming the credit correctly. According to Paychex, businesses should be cautious of third-party advice and work with their accountant or payroll specialist to ensure that they are claiming the credit correctly.
Document Eligibility Requirements
Businesses must document their eligibility for the ERTC, including a significant decline in gross receipts or a partial or full suspension of their operations due to a government order. According to the IRS, businesses must maintain documentation to support their claim for the credit.
Do Not Double Dip
Businesses cannot claim the ERTC and PPP loan at the same time for the same wages. According to Paychex, businesses that received a PPP loan can claim the ERTC on wages that were not used to calculate the PPP loan forgiveness. However, businesses cannot claim the ERTC on the same wages used to calculate the PPP loan forgiveness.
In the next section, we will provide some final thoughts on the ERTC.
Take Advantage of the ERTC Today
In this article, we have discussed the Employee Retention Tax Credit (ERTC), a valuable tax credit available to businesses impacted by the COVID-19 pandemic. We have covered the basics of the credit, eligibility requirements, and how to claim the credit.
By claiming the ERTC, businesses can receive a significant financial benefit, keep employees on payroll, and take advantage of a refundable tax credit. However, businesses must be aware of the eligibility requirements, rules regarding double-dipping with PPP loans, and the complexity of claiming the credit.
If you believe that your business is eligible for the ERTC, we recommend that you review your payroll records, work with your accountant or payroll specialist, and document your eligibility requirements. By taking these steps, you can maximize your ERTC claim and receive a valuable financial benefit during the pandemic.
We hope that this article has been helpful in explaining the ERTC and how your business can take advantage of this valuable tax credit. For more helpful content on business finance, tax planning, and more, be sure to check out our other articles.
Answers To Common Questions
Who is eligible for the Employee Retention Tax Credit?
Employers who experienced significant declines in gross receipts or were fully or partially suspended due to the pandemic.
What is the Employee Retention Tax Credit?
A refundable tax credit for businesses impacted by the COVID-19 pandemic who paid employees or had significant declines in gross receipts.
How can businesses claim the Employee Retention Tax Credit?
By filing an amended tax return for 2020 and 2021 or claiming the credit on their quarterly employment tax returns.
Who can businesses work with to ensure they are claiming the credit correctly?
Their accountant or payroll specialist, who can provide guidance on the complex eligibility requirements.
What documentation is required for the Employee Retention Tax Credit?
Documentation supporting eligibility, including a significant decline in gross receipts or a full or partial suspension of operations.
How can businesses avoid double-dipping with PPP loans?
By not claiming the Employee Retention Tax Credit on wages used to calculate PPP loan forgiveness.
