Does your business qualify for the Employee Retention Tax Credit (ERTC)?
If you are struggling to keep your doors open and employees on the payroll, your business may qualify for ERTC.
According to the National Federation of Independent Business, Inc., 4% of small businesses know about the Employee Retention Tax Credit.
What is ERTC?
The Employee Retention Tax Credit provides your business with a sense of relief. This is a refundable payroll tax credit to incentivize businesses by keeping their employees on the payroll.
The ERTC is under the Coronavirus Aid Relief and Economic Security (Cares Act).
The CARES Act changed several times to help Americans get through the hardships caused by the pandemic.
If you need a better understanding of the benefits of the ERTC and how to calculate ERTC correctly, read on.
Confusion and the ERTC
It's not unusual for business owners to be unsure of whether they qualify for the Employee Retention Tax Credit.
With all the changes, many businesses don’t know the ERTC benefits. It's reported that 47% of businesses might take advantage of the tax credit.
When the ERTC was first introduced, businesses that took part in the Paycheck Protection Program (PPP) could not claim this tax credit. The Employee Retention Tax Credit under the CARES Act did not include businesses that got a PPP loan.
The Consolidated Appropriation Act (CAA) became law on December 27, 2021. The CAA changed some of the ERTC provisions. Borrowers who took out a PPP loan in 2020 are now eligible for the Employee Retention Tax Credit with the help of the CAA.
If you contributed to your full-time employee's healthcare, under the CAA provision, healthcare contributions are now qualified wages. The Cares Act allowed employers to claim 50% of qualified wages and the Consolidated Appropriation Act increased the claim amount to 70%.
Calculating the qualified wages changed from an annual to a quarterly basis. These qualified wages went from $5,000 to $10,000, depending on the year and quarter.
To be clear, for 2020, you can receive a credit equal to 50% of the first $10,000 paid in qualified wages per employee. For quarters 2-4, the maximum credit for qualified wages is $5,000.
For 2021, you can receive a credit equal to 70% of the first $10,000 paid in qualified wages per employee. This would limit the maximum credit to $7,000 per employee.
The American Rescue Plan Act became law on March 11, 2021, and the ERTC received an extension.
The Infrastructure Investment and Jobs Act became law on November 15, 2021. This bill gave the ERTC another extension.
Does Your Business Qualify for ERTC?
In the September 2020 Yelp: Economic Impact Report, 97,966 businesses marked their Yelp account as permanently closed.
Fast-forwarding to 2022, businesses are still struggling with finding new employees, keeping the dedicated employees on the payroll, and dealing with supply chain shortages.
Has your business suffered a partial or full shutdown, or experienced supply chain issues? If so, your business may qualify for the ERTC.
It's been recently reported that Whirlpool notified its customers that due to supply chain shortages, there will be delivery delays. Tesla is expecting delays because of computer chip shortages.
No matter the size of your business or trade, if you were operating your business during the pandemic with disruption from the COVID-19 virus, it’s possible your business is eligible for the ERTC.
Eligible businesses can claim the Employee Retention Tax Credit retroactively for wages up to September 30, 2021, excluding the Recovery Startup Business.
Businesses that opened their doors after February 15, 2020, and paid qualified wages through December 31, 2021, are Recovery Startup Businesses.
If you are a tax-exempt business such as a school, hospital, or non-profit organization, you may qualify for the Employee Retention Tax Credit.
Government entities such as local governments, state, and federal entities do not qualify for ERTC.
If you are self-employed and did not have a full-time employee on payroll, you are not eligible for the Employee Retention Tax Credit.
Gross Receipts and Eligibility for ERTC
If your business suffered a significant decline in gross receipts in 2020 or 2021, you may be eligible for the Employee Retention Tax Credit.
If your gross receipts took a hit in 2020 of at least 50% less than in 2019, you are eligible. In 2021, your business is also eligible if your gross receipts and profits declined at least 20% compared to the year 2020.
The gross receipts are calculated by quarter. It is important to know that the IRS considers all businesses a single employer to calculate the Employee Retention Tax Credit properly.
Your business may have several locations, but the ERTC calculations count each location as one single employer.
Qualified Wages and Cash Tips
The qualified wages include how many full-time employees you had during the tax year of 2020 and 2021.
For your 2020 tax year, the IRS considers you a small business if you had 100 or fewer full-time employees in 2019.
To qualify for the Employee Retention Tax Credit for the tax year 2021, you must have fewer than 500 employees.
According to the IRS, a full-time employee is someone who works a minimum of 30 hours per week or 130 hours a month.
As a small business, you can include all wages, health care contributions, paid time off, and sitting idle wages during the government shutdown.
The health care contribution includes paying your employee's premiums and prescriptions under your company plan.
If you are a large employer with full-time employees, wages that are employee benefits are not eligible for the ERTC.
However, if you paid your employees’ wages while they were not working, you may qualify for the Employee Retention Tax Credit.
The IRS ERTC guidelines changed in August 2021. If you own a restaurant, cash tips of more than $20 per month are qualified wages that must be reported as income on your employee W2 to qualify.
These cash tips might be an issue when calculating qualified wages from your PPP loan. The cash tips are not employer expenses and can cause difficulty when calculating your Employee Retention Tax Credit.
One of our representatives can help you evaluate your qualified wages to ensure a stress-free process.
ERTC and PPP Loan
If you received a Paycheck Protection Program loan, your qualified wages are eligible for the Employee Retention Tax Credit. Payroll costs to get the PPP loan are not a qualified wage.
If you are considering pursuing PPP forgiveness or you’re not sure exactly how to claim the Employee Retention Tax Credit, take our 60-second quiz.
If you already received the forgiveness of a PPP loan, the loan amount can be excluded from the number of gross receipts. This benefit was introduced as a new safe harbor on August 10, 2021.
The Cares Act provided several options for businesses to attempt to keep their employees.
Under the new safe harbors, your business may have received additional assistance besides the PPP loan. If so, calculating the ERTC will require a professional to guide you through your ERTC application journey.
How Do the Credits Work?
In 2020, the ERTC was claimed against the Social Security Taxes. However, in 2021, this changed to Medicare taxes. The change will only apply to wages paid after June 30, 2021.
If the credit exceeds your total liability of the social security or Medicare taxes, it will be treated as an overpayment, and you will get a refund.
Documents Needed to Apply for ERTC
Determining your Employee Retention Tax Credit can feel overwhelming. Make sure you have the following information:
- Detailed documentation and reports of wages paid under the Paycheck Protection Program (PPP)
- A copy of your Paycheck Protection Program loan documentation
- A report on healthcare contributions for each full-time employee
Quarterly payroll return documentation
- Documentation of full-time employees
- Documentation of lines of business such as products and services offered
- Report of full-time employees' qualified wages
- Quarterly revenue report for 2019, 2020, and 2021
- Copies of your completed employment tax returns
You have three years to amend your tax return from the date of filing to claim your ERTC.
ERTC and Your Tax Return
Claiming your Employee Retention Tax Credit is a complex process. If you are considering reducing wage deposits by advancing the Employee Retention Tax Credit, starting this process with dedicated support is essential.
In order to claim the credit, employers must file a federal employment tax return. This is often Form 941, Quarterly Federal Tax Return.
If you didn't claim the ERTC and realize later that you qualify, you can amend your Form 941.
Requesting an amendment of your tax return is a good option. If your credits exceed payroll taxes, you may qualify for a tax refund.
The 941-X form is the correct document to amend your return and can be uploaded to our secure portal to further assist you in this process.
How to Calculate ERTC Correctly
Having read the above information, you have determined that your business qualifies for the Employee Retention Tax Credit.
How to calculate ERTC correctly requires you to know your quarterly payroll numbers and health expenses. You must have a general understanding of your qualified wages.
For example, if your business was interrupted because of COVID-19 for Quarters 2-4 of the year 2020, but you paid five full-time employees their regular full-time wages.
The Employee Retention Tax Credit for 2020 is 50% of qualifying wages, and you can take a maximum credit of $5,000 per employee.
If after careful calculation, you determined each employee had qualifying wages in the amount of $6,000 per quarter, only 50% of qualifying wages may be claimed as an ERTC.
The ERTC available to claim for each employee is $3,000. These qualified wages were paid between March 13, 2020 and December 31, 2020.
For 2021, the Employee Retention Tax Credit is 70% of qualifying wages, and you can take a maximum credit of $7,000 per person.
According to your calculations, each employee earned $6,000 per quarter in qualifying wages. But only 70% of qualifying wages may claim the ERTC.
The tax credit available to claim for each employee is $4,200. These qualified wages were paid for each quarter between January 1,2021 and September 30, 2021.
Perhaps you decided you qualify for ERTC based on your business expenses and gross receipts being less than 50% in the same quarter of 2020 as compared with the same quarter of 2019.
If your gross receipts decreased by 20% in 2021 compared to the same quarter in 2020, you are eligible for the ERTC.
New Businesses and Distressed Businesses
If you are a new business that opened its doors after February 15, 2020, you can claim qualified wages up to December 31, 2021. The qualified wages must be less than one million of gross receipts.
With the social distancing, government shutdowns, and a 90% decline in quarterly gross receipts, the IRS would deem your company as a severely distressed business.
As a business owner who qualifies as a severely financially distressed employer, you can claim ERTC for all wages up to $10,000 paid to employees as qualified wages.
Each quarter that your business has seen a decline in gross receipts of 90% or more than the previous year, your business qualifies for the Employee Retention Tax Credit.
Get the Tax Credit You Deserve Today
If you’re still confused about how to calculate ERTC correctly, there is no need to be discouraged.
The Employee Retention Tax Credit can provide a significant tax break, so it's worth taking the time to find out if you qualify.
If you need help filing for this tax credit, our team can assist you.
As a busy business owner, it’s important to have a trusted resource that can help you through the ERTC process.
Take our secure quiz to see if you are eligible and we can help you get the most out of your Employee Retention Tax Credit.