What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a refundable tax credit designed to help businesses keep employees on their payroll during the COVID-19 pandemic. As explained by the IRS, the credit is available to businesses that paid employees during the pandemic or had significant declines in gross receipts in 2020 and 2021. Eligible employers can claim the credit on their tax returns, and recovery startup businesses can claim it in Q4 2021.
Importance for Businesses
The ERTC can be a significant financial benefit for eligible businesses. As explained by Lendio, the credit amount varies based on the year and size of the business. Businesses can claim up to $5,000 per employee for wages paid in 2020 and up to $28,000 per employee for wages paid in 2021. The credit is refundable and does not need to be paid back.
Businesses that received PPP loans are also eligible for the ERTC. However, as Paychex explains, the credit cannot be taken on wages forgiven under PPP. Employers must work with their accountant and payroll specialist to determine their eligibility for the credit and how to best take advantage of it.
In the next sections, we will discuss the eligibility criteria, qualifying wages, how to claim the credit, changes to the credit, and the benefits of the ERTC.
Eligibility for the Employee Retention Tax Credit
To be eligible for the ERTC, businesses must meet certain criteria, as explained by the US Chamber of Commerce.
Significant Decline in Gross Receipts
To be eligible for the ERTC in 2020, businesses must have experienced a significant decline in gross receipts. This means that gross receipts for any quarter in 2020 must have been less than 50% of gross receipts for the same quarter in 2019. Alternatively, businesses can compare their 2020 quarterly gross receipts to the same quarter in 2019 and qualify if their gross receipts were less than 80% of what they were in 2019.
For 2021, businesses must have experienced a significant decline in gross receipts for any quarter in 2021. Gross receipts for the quarter must be less than 80% of gross receipts for the same quarter in 2019.
Eligible Employers
Eligible employers for the ERTC include private companies that meet certain criteria, such as being ordered to shut down or experiencing a significant drop in gross receipts. As Paychex explains, the credit can be claimed by businesses that were fully or partially suspended or had to reduce business hours due to a government order or had a significant decline in gross receipts.
Business owners may also potentially qualify for the ERTC if they own less than 50% of the business or multiple owners own less than 50% ownership.
PPP Loans and the ERTC
As mentioned earlier, businesses that received PPP loans are also eligible for the ERTC. However, as Paychex explains, the credit cannot be taken on wages forgiven under PPP.
Employers must work with their accountant and payroll specialist to determine their eligibility for the credit and how to best take advantage of it.
Qualifying Wages for the ERTC
The ERTC is based on qualifying wages paid to employees. As explained by Lendio, qualifying wages are wages paid between March 13, 2020, and December 31, 2020, for the 2020 credit, and between January 1, 2021, and December 31, 2021, for the 2021 credit.
Amount of Qualified Wages
The amount of qualified wages that can be taken into account for the ERTC depends on the size of the business and the year. As explained by Lendio, businesses with more than 500 employees can only take the credit on wages paid to employees who were not providing services, while businesses with 500 or fewer employees can take the credit on all qualified wages paid to employees.
For the 2020 credit, businesses can claim up to $5,000 per employee for wages paid between March 13, 2020, and December 31, 2020. For the 2021 credit, businesses can claim up to $7,000 per employee per quarter for wages paid between January 1, 2021, and December 31, 2021.
Qualified Health Plan Expenses
In addition to qualified wages, businesses can also claim the ERTC on qualified health plan expenses. As explained by the IRS, qualified health plan expenses include both the portion of the cost paid by the employer and the portion of the cost paid by the employee with pre-tax salary reduction contributions.
Interaction with Other Credits
As explained by Paychex, businesses cannot double-dip for credits. This means that if a business has already claimed a credit for paid sick leave or paid family leave, they cannot claim the ERTC on the same wages.
Employers should work with their accountant and payroll specialist to determine the best way to take advantage of the ERTC and ensure that they are not double-dipping for credits.
Claiming the Employee Retention Tax Credit
Businesses can claim the ERTC on their quarterly employment tax returns, as explained by the IRS. The credit is claimed on Form 941 for each quarter that the business paid qualified wages.
Retroactive Claims
As explained by Paychex, 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.
Recovery Startup Businesses
According to the IRS, recovery startup businesses are eligible to claim the ERTC for the fourth quarter of 2021, even if they did not experience a significant decline in gross receipts. A recovery startup business is defined as a business that began operating after February 15, 2020, and has average annual gross receipts of $1 million or less.
Penalty Relief
Employers should be cautious of third-party advice when claiming the ERTC, as explained by the IRS. Penalty relief is available for claims related to the credit. Employers should work with their accountant and payroll specialist to ensure that they are claiming the credit correctly.
Amending Tax Filings
As explained by Lendio, businesses have until April 2024 and April 2025 to amend their tax filings for 2020 and 2021, respectively. Employers should work with their accountant and payroll specialist to ensure that they are taking advantage of the ERTC and amending their tax filings if necessary.
Changes to the ERTC
The ERTC has changed over time, making it confusing to track current eligibility requirements, as explained by the US Chamber of Commerce. Employers should stay up to date on the latest changes to the ERTC and work with their accountant and payroll specialist to ensure that they are taking advantage of the credit.
How the Employee Retention Tax Credit Can Benefit Your Business
The ERTC can provide significant benefits for businesses impacted by the pandemic. Here are some of the ways that the credit can benefit your business.
Cash Flow
The ERTC is a refundable tax credit, which means that businesses can receive a refund for any excess credit beyond their tax liability. As explained by SnackNation, this can provide a much-needed boost to cash flow for businesses that have been impacted by the pandemic.
Cost Savings
By taking advantage of the ERTC, businesses can save money on payroll costs. As explained by Lendio, businesses can claim up to $5,000 per employee for the 2020 credit and up to $7,000 per employee per quarter for the 2021 credit. This can provide significant cost savings for businesses, especially those that have been struggling with reduced revenue during the pandemic.
Retaining Employees
The ERTC was created to help businesses keep employees on their payroll during the pandemic, as explained by SnackNation. By taking advantage of the credit, businesses can retain their employees and avoid layoffs or furloughs. This can help to maintain morale and productivity among employees, which can benefit the business in the long run.
Supporting Recovery
The ERTC can also help businesses to support their recovery from the pandemic. As explained by the US Chamber of Commerce, the credit can provide a much-needed boost to cash flow and cost savings, which can help businesses to invest in their operations and support their recovery.
Competitive Advantage
By taking advantage of the ERTC, businesses can gain a competitive advantage in their industry. As explained by SnackNation, the credit can provide cost savings and cash flow benefits that can help businesses to invest in innovation, marketing, or other areas that can help them to stand out from their competitors.
Employers should work with their accountant and payroll specialist to determine how the ERTC can benefit their business and how to best take advantage of the credit.
Conclusion: Conclusion
Businesses impacted by the pandemic may benefit greatly from the Employee Retention Tax Credit. Businesses can save money on payroll expenses, keep their staff, support their recovery, and gain a competitive edge in their sector by utilizing the credit.
To determine how to best utilize the credit and make sure they are claiming it correctly, employers should collaborate with their accountant and payroll specialist. Businesses have an opportunity to profit from the ERTC and aid in their recovery from the pandemic thanks to the retroactive claims and penalty relief that are offered.
Ready to Take Advantage of the Employee Retention Tax Credit?
The Employee Retention Tax Credit can provide significant benefits for businesses impacted by the pandemic. By taking advantage of the credit, businesses can save money on payroll costs, retain their employees, support their recovery, and gain a competitive advantage in their industry.
If you're ready to take advantage of the Employee Retention Tax Credit, be sure to work with your accountant and payroll specialist to determine how to best take advantage of the credit. With retroactive claims available, businesses have an opportunity to benefit from the ERTC and support their recovery from the pandemic.
Thank you for reading this article on the Employee Retention Tax Credit. Be sure to check out our other great content for more tips and insights on navigating the challenges of running a business in today's economy.
Q & A
Q.Who is eligible for the Employee Retention Tax Credit?
A.Eligible employers include those who paid wages during the pandemic or had significant reductions in gross receipts.
Q.What is the Employee Retention Tax Credit?
A.The Employee Retention Tax Credit is a refundable tax credit for businesses that paid employees during the pandemic or had significant declines in gross receipts.
Q.How can the Employee Retention Tax Credit benefit my business?
A.By taking advantage of the credit, businesses can save money on payroll costs, retain their employees, support their recovery, and gain a competitive advantage.
Q.What is the process for claiming the Employee Retention Tax Credit?
A.Employers can claim the credit on their tax returns, and recovery startup businesses can claim it in Q4 2021. Employers should work with their accountant and payroll specialist to ensure they are claiming the credit correctly.
Q.Who can help me navigate the Employee Retention Tax Credit?
A.Employers should work with their accountant and payroll specialist to determine how to best take advantage of the credit and ensure that they are claiming the credit correctly.
Q.What if I already received a PPP loan, can I still claim the Employee Retention Tax Credit?
A.Yes, businesses that received PPP loans are also eligible for the Employee Retention Tax Credit. However, the credit cannot be taken on wages forgiven under PPP.
