The Employee Retention Tax Credit (ERTC) is a significant financial relief option created by Congress in March 2020 to aid small businesses during the economic hardship caused by the COVID-19 pandemic The credit has since been expanded twice, meaning more struggling companies can now use it cut down their federal tax bill.
The ERTC was initially set to expire on January 1, 2022; however, the 2021 Infrastructure Bill retroactively accelerated the credit’s end date to October 1, 2021. Though the ERTC has expired, eligible employers can still claim the credit for their 2020 or 2021 taxes by amending their returns.
ERTC Definition
When the COVID-19 pandemic took hold, business as we knew it before came to a sudden and dramatic halt. Countless companies around the world were forced to close their doors, sending shockwaves of economic disruption throughout their communities. Even those that managed to remain open were soon faced with extreme operational changes. In response, the U.S. government introduced the Employee Retention Tax Credit (ERTC), also referred to as the Employee Retention Credit (ERC). The ERTC is part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2.2 trillion economic stimulus bill signed into law in March of 2020.
Essentially, the ERTC is a retroactive credit that compensates U.S. businesses that weathered COVID and kept at least 2 employees on the payroll, as it was designed to incentivize businesses to keep employees on their payrolls during a period of economic hardship. The ERTC is not a loan, it does not need to be repaid, it is a tax credit. Eligible companies can receive as much as $7,000 per employee per quarter for the first three quarters in 2021, which equals $21,000 per employee potentially coming back to your company. They might also qualify for $5,000 per employee for all of 2020.
ERTC Qualification
The ERTC was designed as an aid for small businesses that lost revenue due to the pandemic. However, only some companies are eligible – private organizations (including nonprofits) must meet one of these criteria to qualify:
- Your business was ordered to partially or fully shut down in 2020 or 2021 by a local government.
- Your gross receipts for a single quarter of 2020 fell by 50% versus the same quarter of 2019 (for the 2020 tax credit).
- Your gross receipts for a single quarter of 2021 decreased by 20% versus the same quarter of 2019 (for the 2021 tax credit).
Government entities and sole proprietors are not eligible to receive the ERTC. Despite this, self-employed people with employees on payroll may still qualify for the credit, which can be used to cover wages paid to other employees.
For companies with 100 or fewer employees, all full-time employees are eligible for benefits regardless of whether they were providing service during the designated period. This is because of the small size of the organization and its limited employee base.
For companies with over 100 employees, only full-time employees who were being compensated while not providing service due to a shutdown will be counted. This is to ensure that organizations are able to sustain operational expenses and protect jobs by ensuring salaries of their employees during the pandemic.
The Family and Medical Leave Act (FMLA) states that employers cannot claim the same employee for both ERTC approval and the Work Opportunity Tax Credit.
One of the most significant changes Congress made to the ERTC in late 2020 was allowing employers who took PPP loans to also be eligible for the ERTC. This modification provides a greater incentive to small business owners and entrepreneurs who may have received PPP funds but need additional relief. However, if your company did take a PPP loan, you can’t claim the ERTC for the same wages counted for PPP forgiveness. Basically, you can’t claim the same payroll costs for both ERTC and PPP.
ERTC Entitlement
Though the ERTC program ended on October 1, 2021, businesses can still take advantage of its benefits. The IRS allows businesses to file for a retroactive refund in the form of IRS Form 941-X.
The IRS form can be used to adjust employment taxes filed within three years of the original return or two years from the date the employer paid the tax. Therefore, eligible companies that did not initially claim their ERTC could potentially do so through 2024, depending on when they originally filed or paid their business taxes. Keep in mind that this retroactive refund is only available for the 2020 tax year and the first three quarters of the 2021 tax year. The eligibility criteria does not apply for Q4 of 2021 or the 2022 tax year and beyond.
As a business owner, make sure you capitalize on the ERTC by including your qualified wages and health insurance costs on your quarterly tax returns. This refundable credit will be used against an employer’s share in Social Security taxes, which is otherwise paid for out of pocket under normal circumstances.
Ahead of receiving the credit, employers may opt to retain the value of employment taxes up to the amount of the ERTC, rather than depositing it, without penalty. Eligible employers that have fewer than 500 full-time employees can also request advance payment of the ERTC. Employers with more than 500 employees are not able to receive an advanceable ERTC.
The ERTC is an excellent opportunity for businesses in need of tax relief, but it does have its complexities. If you believe your company is eligible, you should immediately speak with your accountant and potentially your payroll preparer. Since the credit size depends on the amount of Social Security taxes that you typically pay, working with both your accountant and payroll handler can help you determine the exact dollar amount for which you qualify. A financial professional can also help make sure you don’t apply the same payroll for both PPP loan forgiveness and the ERTC.