Understanding How to Claim Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit for businesses that paid employees during the pandemic or had significant declines in gross receipts. Eligible employers can claim the credit on their tax returns, and recovery startup businesses can claim it in Q4 2021. The American Rescue Plan extends the availability of the ERTC and Paid Leave Credits for small businesses through December 2021, allowing businesses to offset payroll tax liabilities and receive tax credits for offering paid leave to employees who may take leave due to illness, quarantine, or caregiving.
Benefits of Claiming ERTC
The ERTC is a powerful tool for businesses to retain their employees during the pandemic. Eligible employers can receive up to 50% of qualifying wages paid from March 13th to October 1, 2021. The ERTC is a refundable tax credit available for businesses impacted by the pandemic, with no limit to how many employees can be given credit for.
Eligibility Criteria
To claim the ERTC, eligible employers must have experienced one of the following:
- A significant decline in gross receipts
- Partial or full suspension of business operations
- Governmental order to fully or partially suspend business operations
To qualify for the ERTC, a business must meet the following criteria:
- The business is still in operation
- The business experienced a significant decline in gross receipts
- The business has not received a Paycheck Protection Program (PPP) loan
Qualifying Wages
The ERTC can be claimed on qualified wages paid from March 13, 2020, to December 31, 2021. Qualified wages are defined as wages paid to employees during the pandemic. The maximum amount of qualified wages that can be claimed per employee is $10,000 for each calendar quarter.
Calculation of the ERTC
The calculation of the ERTC depends on the year in which the qualified wages were paid.
Calculation of the ERTC in 2020
In 2020, eligible employers can claim up to 50% of qualified wages paid between March 13, 2020, and December 31, 2020. The maximum amount of ERTC that can be claimed is $5,000 per employee.
Calculation of the ERTC in 2021
In 2021, eligible employers can claim up to 70% of qualified wages paid between January 1, 2021, and December 31, 2021. The maximum amount of ERTC that can be claimed is $28,000 per employee.
Business owners should be cautious of third-party advice and seek guidance from a tax expert to ensure they are maximizing their ERTC potential.
How to Claim the Employee Retention Tax Credit
Claiming the ERTC involves filing Form 941 or Form 941-X for retroactive claims. Recovery startup businesses can also claim the ERTC in Q4 2021. Here is a step-by-step guide on how to claim the ERTC:
Claiming the ERTC on Form 941
Eligible employers can claim the ERTC on their quarterly employment tax returns, Form 941. To claim the ERTC on Form 941, eligible employers should:
- Check the box labeled “Employee Retention Credit” on Line 11c of Form 941.
- Enter the ERTC amount on Line 11e of Form 941.
- Report the total qualified wages and tips paid to all employees on Line 11b of Form 941.
- Report the total social security and Medicare tax owed on all wages paid to all employees on Line 13c of Form 941.
Filing Form 941-X for Retroactive ERTC Claims
Eligible employers can file Form 941-X to claim retroactive ERTC for previous quarters. To file Form 941-X, eligible employers should:
- Obtain a copy of the original Form 941 for the quarter in which the qualified wages were paid.
- Complete Form 941-X, making sure to include the following information:
- The amount of the ERTC claimed
- The quarter for which the ERTC is being claimed
- The number of employees for which the ERTC is being claimed
- The total amount of qualified wages paid for the quarter
- File Form 941-X with the IRS.
ERTC for Recovery Start-Up Businesses
Recovery start-up businesses can claim the ERTC in Q4 2021. To claim the ERTC as a recovery start-up business, eligible employers must:
- Have started their business after February 15, 2020
- Have gross receipts of less than $1 million in 2020
- Not have been in existence for more than two years
- Meet the eligibility criteria for the ERTC
Caution for Third-Party Advice
Employers should be cautious of third-party advice when claiming the ERTC and should verify that the advice received is reliable. The IRS notes that they will not hesitate to impose penalties on tax return preparers who provide incorrect advice. Employers can also take advantage of penalty relief for claims related to the ERTC. As SnackNation notes, the ERTC is a powerful tool for businesses to retain their employees during the pandemic. Eligible employers can receive up to 50% of qualifying wages paid from March 13th to October 1, 2021. The ERTC is a refundable tax credit available for businesses impacted by the pandemic, with no limit to how many employees can be given credit for. Additionally, the American Rescue Plan extends the availability of the ERTC and Paid Leave Credits for small businesses through December 2021, allowing businesses to offset payroll tax liabilities and receive tax credits for offering paid leave to employees who may take leave due to illness, quarantine, or caregiving.
Eligibility Criteria for the Employee Retention Tax Credit
To claim the ERTC, eligible employers must have experienced one of the following:
- A significant decline in gross receipts
- Partial or full suspension of business operations
- Governmental order to fully or partially suspend business operations
To qualify for the ERTC, a business must meet the following criteria:
Still in Operation
The business must still be in operation. As the IRS notes, if a business has permanently closed its doors, it is not eligible for the ERTC.
Significant Decline in Gross Receipts
The business must have experienced a significant decline in gross receipts. As uschamber.com notes, a significant decline in gross receipts is defined as a decline of 50% or more in gross receipts when compared to the same quarter in the previous year. Alternatively, a business may also qualify if gross receipts for a calendar quarter in 2020 or 2021 are less than 80% of the gross receipts from the same calendar quarter in 2019.
Not Received a Paycheck Protection Program (PPP) Loan
The business must not have received a Paycheck Protection Program (PPP) loan. As the IRS notes, businesses that have received a PPP loan are not eligible for the ERTC, even if they did not use the entire loan or have not yet applied for forgiveness.
Partial or Full Suspension of Business Operations
The business must have experienced a partial or full suspension of business operations. As erctoday.com notes, this can include suspension due to orders from a governmental authority, such as a shutdown order, or suspension due to a lack of supply, such as a lack of raw materials.
Owners of the Business
Eligible employers include those who have been impacted by COVID-19 and demonstrate at least a 50% drop in gross receipts when compared to similar quarters. Business owners may potentially qualify for the ERTC if they own less than 50% of the business or multiple owners own less than 50% ownership, as SnackNation notes.
It is important to note that eligibility criteria for the ERTC have changed over time, making it confusing to track current eligibility requirements, as uschamber.com notes. Seeking guidance from a tax expert can help businesses determine their eligibility and maximize their potential credit while avoiding pitfalls.
Maximizing the Employee Retention Tax Credit
The ERTC can provide significant relief for businesses impacted by the pandemic. Here are some tips for maximizing the credit:
Keep Accurate Records
As the IRS notes, employers claiming the ERTC should keep accurate records to support the credit. Records should include:
- Documentation of the number of full-time and part-time employees
- Dates of employment for each employee
- Qualifying wages and the amount of the credit for each quarter
- Supporting documentation for the decline in gross receipts or suspension of business operations
By keeping accurate records, employers can ensure they are claiming the correct amount of the credit and avoid penalties for incorrect claims.
Work with a Tax Expert
As eligibility criteria for the ERTC have changed over time, seeking guidance from a tax expert can help businesses determine their eligibility and maximize their potential credit while avoiding pitfalls, as erctoday.com notes. Tax experts can also help businesses keep accurate records and avoid penalties for incorrect claims.
Consider Retroactive Claims
Eligible employers can file Form 941-X to claim retroactive ERTC for previous quarters. As the IRS notes, employers can file Form 941-X for a specific quarter to correct errors made on a previously filed Form 941. By filing Form 941-X for retroactive ERTC claims, eligible employers can claim the credit for previous quarters and receive a refund for any overpaid taxes.
Take Advantage of Penalty Relief
Penalty relief is available for claims related to the ERTC. As the IRS notes, employers that receive a notice or letter from the IRS and have reasonable cause for the incorrect claim can request penalty relief. By taking advantage of penalty relief, employers can avoid penalties for incorrect claims and maximize their potential credit.
Be Aware of Changes in Legislation
As legislation related to the ERTC can change over time, it is important for employers to stay up-to-date on current eligibility requirements and potential changes to the credit. By staying informed, employers can ensure they are claiming the correct amount of the credit and avoid penalties for incorrect claims.
Get the Relief You Deserve with the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a valuable resource for businesses impacted by the pandemic. Eligible businesses can receive up to 50% of qualifying wages paid from March 13th to October 1, 2021, with no limit to how many employees can receive credit. By claiming the ERTC, businesses can receive significant relief for their payroll taxes and maximize their potential credit by keeping accurate records and working with tax experts.
If you believe your business may be eligible for the ERTC, be sure to review the eligibility criteria and consider retroactive claims for previous quarters. By taking advantage of penalty relief and staying informed about changes in legislation, you can ensure you are claiming the correct amount of the credit and avoid penalties for incorrect claims.
At ertcguy.com, we specialize in providing businesses with the information and resources they need to maximize their potential credit and get the relief they deserve. Be sure to check out our other great content for more tips and advice on navigating the payroll tax landscape and growing your business.
Common Questions
Q: Who is eligible for the Employee Retention Tax Credit?
A: Eligible employers include those impacted by COVID-19 and demonstrate at least a 50% drop in gross receipts.
Q: What is the Employee Retention Tax Credit?
A: The ERTC is a refundable tax credit for businesses that paid employees during the pandemic or had significant declines in gross receipts.
Q: How do I claim the Employee Retention Tax Credit?
A: Eligible employers can claim the credit on their tax returns, and recovery startup businesses can claim it in Q4 2021.
Q: What if my business received a PPP loan?
A: Businesses that have received a PPP loan are not eligible for the ERTC, even if they did not use the entire loan or have not yet applied for forgiveness.
Q: How can I maximize my ERTC?
A: Keep accurate records, work with a tax expert, consider retroactive claims, take advantage of penalty relief, and stay informed.
Q: What happens if I make an incorrect ERTC claim?
A: Employers that receive a notice or letter from the IRS and have reasonable cause for the incorrect claim can request penalty relief.
