Eligibility for the Employee Retention Tax Credit (ERTC)
Businesses that have been impacted by the COVID-19 pandemic can benefit from the Employee Retention Tax Credit (ERTC). The ERTC is a refundable tax credit that provides relief to eligible employers who paid qualified wages to employees. Here's what you need to know about ERTC eligibility:
Criteria for Eligibility
To qualify for the ERTC, businesses must meet certain criteria, including:
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Significant decline in gross receipts: Businesses that have experienced a significant decline in gross receipts are eligible for the ERTC. According to IRS, a significant decline in gross receipts is defined as a decrease of 50% or more in gross receipts for a quarter in 2020 compared to the same quarter in 2019. For 2021, businesses must have a decline of 20% or more in gross receipts for a quarter compared to the same quarter in 2019.
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Full or partial suspension of business operations: Businesses that have had to fully or partially suspend their operations due to a government order are eligible for the ERTC. This includes businesses that have had to reduce their hours of operation due to the pandemic.
Qualifying Wages and Compensation
Qualified wages are wages paid to employees that meet certain criteria. Here's what you need to know about qualifying wages and compensation:
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Definition of qualified wages: Qualified wages are wages paid to employees between March 13, 2020 and December 31, 2021. The wages must be paid to employees who were not working due to a full or partial suspension of business operations, or due to a significant decline in gross receipts.
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Limits on qualified wages: The maximum amount of qualified wages that can be taken into account for each employee is $10,000 per year for wages paid between March 13, 2020 and December 31, 2020, and $10,000 per quarter for wages paid in 2021. This means that the maximum credit per employee is $5,000 in 2020 and $7,000 per quarter in 2021.
PPP and ERTC Double-Dipping Rules
Businesses that have received Paycheck Protection Program (PPP) loans are still eligible for the ERTC, but there are limitations. Here's what you need to know about PPP and ERTC double-dipping rules:
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Explanation of limitations: Businesses cannot take the ERTC for wages that have been forgiven under PPP. This means that businesses cannot double-dip on credits.
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Advisement to consult with accountant and payroll specialist: To ensure compliance with PPP and ERTC double-dipping rules, businesses are advised to work with their accountant and payroll specialist.
Calculation and Claiming of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) provides eligible employers with a refundable tax credit for wages paid to employees during the COVID-19 pandemic. Here's what you need to know about the calculation and claiming of the ERTC:
Credit Percentages and Limitations
The ERTC is calculated based on the amount of qualified wages paid to employees. The credit is equal to:
- 50% of qualified wages: For wages paid between March 13, 2020 and December 31, 2020.
- 70% of qualified wages: For wages paid between January 1, 2021 and December 31, 2021.
The maximum amount of qualified wages that can be taken into account for each employee is $10,000 per year for wages paid between March 13, 2020 and December 31, 2020, and $10,000 per quarter for wages paid in 2021. This means that the maximum credit per employee is $5,000 in 2020 and $7,000 per quarter in 2021.
Amended Tax Return Lookback Process
Businesses that missed out on claiming the ERTC for previous quarters can do so by conducting a lookback on their payroll during the pandemic and filing an amended tax return. Here's what you need to know about the amended tax return lookback process:
- Explanation of the process: 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.
- Timeline for retroactive claims: Businesses have until the later of July 31, 2021 or six months after the applicable due date of their tax return to claim the ERTC for qualified wages paid in 2020.
Recovery Startup Business Eligibility for Q4 2021
The Consolidated Appropriations Act introduced a new provision for recovery startup businesses to claim the ERTC in Q4 2021. Here's what you need to know about recovery startup business eligibility for Q4 2021:
- Definition of recovery startup businesses: Recovery startup businesses are businesses that began operating after February 15, 2020 and have average annual gross receipts of $1 million or less.
- Eligibility criteria and limitations: Recovery startup businesses can claim the ERTC up to $50,000 per quarter in Q4 2021. Unlike other businesses that can claim the ERTC against 70% of qualified wages, recovery startup businesses can only claim the credit against 50% of qualified wages.
How to Claim the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) can be claimed by eligible employers who paid qualified wages to employees during the COVID-19 pandemic. Here's what you need to know about how to claim the ERTC:
Claiming the ERTC on Form 941
Eligible employers can claim the ERTC on their quarterly Form 941. Here's what you need to know about claiming the ERTC on Form 941:
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Explanation of Form 941: Form 941 is the Employer's Quarterly Federal Tax Return. It's used to report income taxes, Social Security taxes, and Medicare taxes withheld from employees' paychecks, and to pay the employer's portion of Social Security and Medicare taxes.
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How to claim the ERTC on Form 941: To claim the ERTC on Form 941, employers should report the amount of qualified wages paid and the amount of the credit on line 11c. Employers can also claim any advance payments of the ERTC on line 13f.
Reducing Payroll Tax Deposits
Eligible employers can reduce their payroll tax deposits instead of claiming the ERTC on their quarterly Form 941. Here's what you need to know about reducing payroll tax deposits:
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Explanation of reducing payroll tax deposits: Employers can reduce their payroll tax deposits by the anticipated amount of the ERTC. This means that employers can keep the cash they would have deposited with the IRS as a payroll tax deposit.
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How to reduce payroll tax deposits: Employers can use Form 941 to reduce their payroll tax deposits. They should report the anticipated amount of the ERTC on line 24 and reduce their payroll tax deposits accordingly.
Filing Form 7200 for Advance Payment
Eligible employers can also file Form 7200 to receive an advance payment of the ERTC. Here's what you need to know about filing Form 7200:
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Explanation of Form 7200: Form 7200 is used to request an advance payment of employer credits, including the ERTC.
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How to file Form 7200: Employers can file Form 7200 to receive an advance payment of the ERTC. They should complete the form and submit it to the IRS. The advance payment will be offset against the employer's payroll tax deposits.
Penalties for False Claims
Employers should be cautious of third-party advice when claiming the ERTC. Here's what you need to know about penalties for false claims:
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Explanation of penalties: Employers who make false claims for the ERTC may be subject to penalties and interest.
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Advisement to work with accountant and payroll specialist: To avoid penalties for false claims, employers are advised to work with their accountant and payroll specialist.
Common Questions and Concerns About the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a complex tax credit that has generated many questions and concerns from eligible employers. Here are some of the common questions and concerns about the ERTC:
Can Employers Double-Dip for Credits?
No, employers cannot double-dip for credits. This means that employers cannot claim the ERTC on wages that have been forgiven under the Paycheck Protection Program (PPP) or on wages that have been used to claim the Families First Coronavirus Response Act (FFCRA) tax credit.
Are Nonprofits Eligible for the ERTC?
Yes, nonprofits are eligible for the ERTC. However, the credit is only available to nonprofits that are tax-exempt under section 501(c) of the Internal Revenue Code and that have experienced a significant decline in gross receipts or have been fully or partially suspended due to a government order.
Are Governmental Employers Eligible for the ERTC?
No, governmental employers are not eligible for the ERTC. This means that federal, state, and local government entities, including their instrumentalities and agencies, are not eligible for the credit.
Can Employers Claim the ERTC for Employees on Leave?
Yes, employers can claim the ERTC for employees on leave. However, the credit cannot be used for certain mandated paid leave wages, such as those provided under the FFCRA.
How Long Will the ERTC Be Available?
The ERTC is currently available until December 31, 2021. However, recovery startup businesses can claim the credit in Q4 2021, and businesses can retroactively claim the credit until 2024 or 2025 by conducting a lookback on their payroll during the pandemic and filing an amended tax return.
How Do I Know If I'm Eligible for the ERTC?
Eligible employers are those that have experienced a full or partial suspension of their business operations or a significant decline in gross receipts due to the COVID-19 pandemic. Employers should work with their accountant and payroll specialist to determine their eligibility for the ERTC.
What Should I Do If I Need Help with the ERTC?
If you need help with the ERTC, you should work with your accountant and payroll specialist. The IRS also provides resources and guidance on the ERTC on their website.
Wrap Up
The Employee Retention Tax Credit (ERTC) is a valuable tax credit for eligible employers who paid qualified wages to employees during the COVID-19 pandemic. By claiming the ERTC, employers can receive a refundable tax credit of up to 70% of qualified wages paid, up to $10,000 per employee per quarter.
In this article, we covered the calculation and claiming of the ERTC, as well as common questions and concerns about the credit. Remember to work with your accountant and payroll specialist to determine your eligibility for the ERTC and to ensure that you're claiming the credit correctly.
We hope this article has been helpful in understanding the employee retention tax credit rules. Be sure to check out our other great content on ertcguy.com for more helpful information on tax credits and other financial topics.
Frequently Asked Questions
Who is eligible to claim the employee retention tax credit?
Eligible employers who paid qualified wages to employees during the pandemic.
What is the maximum amount of qualified wages that can be claimed for the ERTC?
The maximum amount of qualified wages that can be claimed is $10,000 per employee per quarter.
How can employers claim the employee retention tax credit?
Employers can claim the ERTC on their tax returns or through a reduction in payroll taxes.
Who should employers work with to determine their eligibility for the ERTC?
Employers should work with their accountant and payroll specialist.
What is the deadline for retroactively claiming the employee retention tax credit?
Employers 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.
How can employers avoid penalties related to claims for the employee retention tax credit?
Employers should be cautious of third-party advice and penalty relief is available for claims related to the credit.
