What is the Employee Retention Credit?

A tax credit for employers impacted by COVID-19 shutdowns or hardships. This refundable tax credit is a relief measure for companies to keep employees on their payroll.
As a result of ERC expansion effective January 1, 2021, all employers who took PPP loans may be eligible for the ERC for 2020 and 2021.

What is the Employee Retention Tax Credit, and How to Apply for it?

 

COVID-19 was a tough time for businesses of all sizes, but small businesses struggled to keep their companies afloat. The biggest challenge was to keep their workforce on the payroll despite the government’s order to suspend everyone. Some companies went on to take a PPP loan just so their employees are paid their wages in full. To provide relief to these companies, the government introduced employee retention tax credits — a refundable tax credit for employers that paid their employees to retain them. 

It was introduced in March 2020. Initially, the credit was set to expire in January 2022. However, the Infrastructure Bill signed by Biden stated that the last date for claiming tax credits on wages paid to the employee amidst the pandemic was September 30th, 2021. The good news is that you can still claim the credit on the wages paid to employees in the previous years if you haven’t already done that. Gather your bank statements and employee payroll receipts to see how much you paid each worker between March 2020 and September 2021. Some businesses qualified for credit till Dec 31, 2021. 

 

What is ERTC? Which Employer is Eligible?

 

The Employee Retention Tax Credit has been amended twice since the day it came into effect. Only a handful of businesses that meet the eligibility criteria set forth by the government for ERTC can use this credit. Here’s how to know if you qualify for the credit.

• The government ordered that your business be partially or completely closed between 2020 and 2021. These companies are eligible for the tax credit only for the quarter they were suspended.
• Your gross earnings for the first quarter of 2020 were 50% less than the same in 2019.
• Your gross earnings for the first quarter of 2021 were 20% less than in 2019.

The act does not cover government entities and sole proprietors. It, however, considers self-employed individuals eligible if they contracted out their work to a third party or had a bunch of employees working full-time for them. Tax-exempt schools, public colleges, and hospitals can also claim the tax credit, given that they have one or more employees that were paid daily wages or monthly compensation throughout the pandemic.

 

CARES Act 2020, Consolidated Appropriations 2021, and American Rescue Plan 2021

 

According to the CARES Act, every qualifying employer who borrowed a PPP loan is eligible to claim a tax credit of 50% of the total wages paid up to $10,000 per employee between March 2020 and December 2020. 

Later, a few changes were passed, which made a $10,000 credit applicable per employee for a single quarter. Also, it allowed employers to claim up to 70% of the wages paid. The employers can claim $7,000 per employee for every quarter for the first three quarters of 2021. 

Then, in the Infrastructure Investment and Jobs Act, Biden changed the end date for claiming the tax credit. Although the expiry date is over, you can still claim the tax credit retroactively by making changes to your previous tax bills.

 

How to Claim for ERTC?

 

To collect detailed guidance on claiming the ERTC, you can check out this notice 2021-20. It shows how employers who borrowed PPP loans are eligible for the refundable tax credit and how it can be claimed. Employers must calculate the total wages paid between March 12, 2020, and September 30, 2021, and mention it on the estimated quarterly tax return form. The tax credit will be subtracted from the employer’s share of the Social Security Tax. 

Some employers with 500 or fewer employees can request the government to make an advance payment for the tax credit. This can be done using Form 7200. 

 

If you couldn’t claim the tax in 2021, you can do it retroactively using Form 941-X. Employers have three years (from the end date) to claim the tax credit. This means you are eligible to file for an employee retention tax credit until 2024. Make sure this tax credit is only for 2020 and the first three quarters of 2021, not beyond that. The government will include this tax credit in your existing taxes. As it’s fully refundable, the balance (which remains after applying the credit to your tax bill) will be credited to your account.

 

It’s best to leave the calculation and filing work to a professional tax accountant familiar with all the laws regarding ERTC. Search for the best CPA company in Orange County, CA, and let them manage your tax credits. They will gather the necessary forms, including your previous tax bills that are to be amended, and file them with the IRS to claim the credit.

 

What Wages are Included?

 

The important question is, how do you know which wages qualify for the tax credit? The IRS notice 2021-20 explains that too. They have elaborated on this subject with seven examples and used real scenarios to help employers know whether their wages qualify for the credit. 

 

How much you can claim against the wages paid depends on how you presented these wages on the PPP loan application. Not only can the businesses claim credit for payroll, but the government includes certain expenses too. That will be only factored in if these expenses, such as utility bills, rent, and other operational costs, were mentioned on the PPP loan forgiveness application. This maximizes the total tax credit you can claim.

 

Wages that are subject to the Social Security and Medicare taxes qualify for the tax credit. Note that the tax credits are allowed for full-time employees only. To qualify, the employee must have worked 30 hours a week.

Businesses that reported more than 100 employees can only claim tax credits for the employees who didn’t work during the COVID pandemic but had to be retained. Companies that had fewer than 100 employees were eligible to claim a tax credit for each employee regardless of whether they worked or not.

 

After the amendments were passed, this number was moved up to 500. That means if you had 500 or fewer employees working for you, they all were included in the ERTC. We’ve already mentioned the amount of credit an employer can claim per employee. It was only 50% of the paid wages for 2020 but was later raised to 70% in 2021. This gives employers a chance to get up to $21,000 per employee for the first three-quarters of 2021 and $15,000 per employee for 2020, starting from March to December 2020. 

 

What About the Tipped Wages?

 

According to the IRS Notice 2021-49, tips will also be counted as qualified wages for a tax credit if they were subject to FICA. That means the total tips paid to each employee must exceed $20 for a month to be considered eligible for a tax credit. The notice has further explained whether ERTC covers spouse or owner wages. Give it a read for a better understanding. 

 

What are the Rules for Recovery Startup?

Most businesses were allowed to claim their ERTC for the wages paid from March 2020 to September 2021. However, the end date was extended to December 2021 for the recovery startups. Given that they qualify for this credit, they can claim 70% of the wages paid to their employees for all four quarters of 2021. A recovery startup is a company that commenced business after Feb 15, 2020. They must meet the following conditions to be considered eligible for the employee retention tax credit.

 

• Earned an annual gross income of less than $1 million
• Had at least one employee (excluding the co-owner)
• Doesn’t fall into the category of businesses that are eligible for ERTC because of a sudden drop in the gross receipts or business suspension.

If you meet the above conditions, check out Notices 2021-20, 2021-23, and 2021-49 to understand the filing procedure. 

 

How does it Work With other Funding Sources?

 

If you are approved for an employee retention tax credit, you can’t get credit for paid family medical leave for these wages. Likewise, the credit does not apply to employees who are eligible for the Work Opportunity Tax Credit. It’s important to note that ERTC is only for the unforgiven wages, or the wages that will be forgiven under the PPP loan in the future.

 

Bottom Line

The Employee Retention Tax Credit was a huge relief for small businesses that faced difficulty keeping their employees on board. Since the businesses remained shut for a long time, there was no way employers could pay hundreds of employees. ERTC came into effect on March 12, 2020, and was discontinued in 2021. 

 

In just one year, the act was amended twice, which made it pretty challenging for employers to know where it stands today. If you are still not sure whether your paid wages qualify for the credit and how much you can claim, feel free to reach out to a professional. Potrus TAX CPA Accounting firm in Orange County, CA, offers full guidance on how to manage your taxes and claim a credit efficiently.