April 12

What Is ERTC Tax Credit?

woman figuring out the ERTC tax credit

What Is ERTC Tax Credit?

In the current environment, all small businesses could use a tax advantage. The Employee Retention Tax Credit is an incentive first implemented by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Congress wanted COVID-19 to make it easier for businesses to keep their employees on the payroll as they deal with the extraordinary effects of COVID-19. An eligible company can get a reimbursable payroll tax credit equal to a percentage of the number of qualified wages they pay.

Businesses were not allowed to get a PPP loan and claim the ERTC initially. With this in mind, the Consolidated Appropriations Act made a much-needed change to the CARES Act.

All eligible employers can now claim the ERTC, even if they have taken out a PPP loan. The Act also lengthened the ERTC to early in 2021.

Origins of the ERTC

The ERTC tax credit is a refundable payroll tax credit for “qualified wages” paid to full-time employees from March 13, 2020, to December 31, 2020. The ERTC’s goal is to encourage businesses to keep their employees on the payroll even if they aren’t working because of coronavirus.

More to Know About the ERTC

The American Rescue Plan (ARP) kept the ERTC going until the end of 2021 (now over on September 30, 2021, with the Infrastructure Investment and Jobs Act).

By 2021, qualified businesses can get a credit equivalent to 70% of the wages they pay to meet the rules. During each quarter, the maximum amount of money each employee can get back is $7,000.

The Infrastructure and Investment Jobs Act also made changes to the ERTC program. Salaries paid after September 30, 2021, can no longer qualify for ERTC use.

Who Qualifies for the ERTC?

Following the American Rescue Plan Act, most employers can get a tax credit, such as colleges, universities, hospitals, and 501(c)(3) organizations.

Before that, the Consolidated Appropriations Act added businesses that took out a loan through the Paycheck Protection Program to the list of companies that qualify. This included companies that took part in the first round of PPP but were not entitled to collect the tax credit.

ERTC Qualifying Factors

One of the following must prove true in the fiscal quarter the company wants to use the credit.

A trade or company had to stop operating entirely or cut its hours because of a government order. The credit only applies to the part of the quarter when the business isn’t running. It doesn’t apply to the whole quarter. Some businesses don’t meet this test and wouldn’t meet the criteria.

These might include essential businesses unless there’s an interruption in their supply of critical materials or goods in a way that affects their capacity to keep working. It may also include companies that closed down but could keep most of their operations going through remote work.

Some of these businesses could still get credit with the second test. A company with a significant drop in gross receipts might get the ERTC. With this in mind, it’s vital to track your expenses closely.

female employee wearing mask while cleaning tables in cafe

ERTC Disqualifying Factors

The CARES Act also has some limiting rules regarding the ERTC. Suppose you got a tax credit for compensated sick and family leaves under the Families First Coronavirus Response Act. In that case, you can’t get the ERTC for the wages paid for paid sick and family leave.

If you took a tax credit for paid family and medical leave under section 45S of the IRS Code, the same applies. In addition, the same is valid for wages paid to some related employees.

Also, Section 51 of the Internal Revenue Code says you can’t get a Work Opportunity Tax Credit for an employee for whom you’ve already received a tax break.

The same applies to salaries affected by some other credits not paid under the CAA in 2021. These breaks include the Credit for Employer Differential Wage, Indian Employment Credit, Research Activities Credit, and Empowerment Zone Employment Credit.

Additional Guidance From the IRS

The IRS recently gave more information about applying for the ERTC. For instance, if a company receives an advance, it must pay it back by the due date for the fourth quarter on Form 941. You’ll get hit with penalties if you don’t pay back these funds by the due date.

After December 20, 2021, the IRS will no longer cancel failure to deposit fines for taxpayers who instead cut back on their required deposits. Furthermore, companies must file Form 941 during tax season or on or before December 31, 2021, for wages paid. They must also transfer the money withheld from taxes previously in the quarter on or before December 31, 2021.

If you don’t qualify for “reasonable cause” relief, you can ask the IRS for tax help.

Details of the Guidance Notice

Notice 2021-20 made it clear how the PPP and ERTC tax credit will function together. To show how to make an election and how the IRS handles extra wages on a loan application, the agency uses a Q&A format.

Question 49 talks about the notice and gives seven examples of different situations. For example, you can put all your eligible wages on your PPP debt forgiveness application and your other expenses, making a surplus of total costs. Also, you can consider extra payroll expenses under the ERTC eligibility rules.

Suppose you have additional expenses that weren’t on the application. In that case, you can’t go back and change the application to add them after the fact.

More IRS Clarifications

The IRS has been very busy in August 2021, revising rules and offering tips. First, the IRS released Notice 2021-49, which gives guidance for the third and fourth quarters of 2021 and new programs and previous notices 2021-20 and 2021-23.

It also adds to and clarifies many of the questions not answered in the previous notices. The notices also explained how to get credits for 2020 and 2021, how the credits work with other deferrals, what wages are, and needed documentation.

The ARP lengthened the ERTC through the finish of 2021, and it also made many changes to the program. For example, it added new categories for businesses just getting started and businesses that are in trouble.

Things You Should Consider

Some of the more important things are still up in the air. For example, if you’re getting ERTC credits for 2020, you have to cut your wages for 2020 because of the credits. In other words, you must change the 2020 income tax return you’ve already submitted.

Also, tip wages of $20 or more a month could qualify as ERTC wages, so you can possibly take both the tip credit and ERTC on the same wages. However, part-time employees don’t count towards the number of workers needed for a small or large employer.

The IRS has also issued Revenue Procedure 2021-33, which gives businesses a safe harbor to figure out how much money they make.

According to the Revenue Procedure, gross receipts don’t include PPP loan forgiveness, Shuttered Venue Operator Grants, and Restaurant Revitalization Grants because they’re not part of gross receipts. This is good news for companies that have already gotten help from COVID-19-related funding.

Who Can Still Apply for the ERTC?

You’re an eligible employer during the fiscal year 2020 or 2021 if you’re still doing business and meet the following test.

If an employer is eligible, it must have a calendar quarter in which the function of the trade or commerce is wholly or partially stopped during the fiscal quarter due to an order from a governmental power restricting commerce or travel.

This could include commercial, social, religious, or other reasons. However, for a company to qualify for benefits, it must significantly drop gross receipts.

Defining Gross Receipts Declines

A significant decline is at least 50% less in gross receipts in any fiscal quarter in 2020 than in the same quarter in 2019.

business closed covid

Suppose gross receipts fell by more than 20% during any calendar quarter in 2021, through September 30, 2021, particularly in comparison to the same quarter in 2019. In that case, it’s considered gross receipts decline.

Suppose your company doesn’t pass these tests and 2021. In that case, a special rule allows an eligible employer to use gross receipts from the preceding quarter assessed at the same time in 2019 to figure out if gross receipts fell more than 20%.

Figuring Out Your Employer Status

To figure out which wages are eligible for the credit, you need to know how many average full-time employees you have. This number is essential. There are different rules about what wages are eligible based on the size of your company.

To determine if you’re eligible for the ERTC, you must know the average number of total employees hired in 2019. You’d base the full-time workers’ computation on the number of full-time employees in 2019, 2020, and 2021.

It’s easy to qualify for 2020 credits if your company has less than 100 average full-time employees. For 2021 credits, a small business must have 500 or fewer average full-time staff members.

Eligible ERTC Wages

All salary and health insurance benefits a small business pays to a worker when the business is an eligible employer are eligible wages for the ERTC. Qualified wages under the ERTC for an eligible company that isn’t a small business are salaries and health insurance benefits paid to employees who can’t work because of the pandemic.

Eligible Wages Limitations

This also means eligible wages for an employee in this group can’t equal more than the amount you’ve compensated workers 30 days before the pandemic started. For 2020, this stipulation means wages paid for work from March 13, 2020, to December 31, 2020. The clause also refers to work done from January 1, 2021, to September 30, 2021.

Calculating Your ERTC

You can use employee wages to figure out the ERTC for all calendar quarters in 2020. However, they can’t equal more than $10,000 for each person.

In other words, the company can get a maximum of $5,000 ($10,000 x 50%) per employee for each calendar quarter paid to qualified employees. In 2021, you can use each employee’s eligible wages to figure out the ERTC. They can’t equal more than $10,000 per quarter.

For each fiscal quarter in which you paid qualified wages, you can claim up to $7,000 ($10,000 x 70%) for each employee. However, you can’t consider eligible wages when determining the ERTC used for other tax breaks and PPP loan forgiveness.

Claiming the Tax Credit

The ERTC is a payroll tax credit, not a tax credit for income. You’ll report it on Form 941.
Qualified employers can get the ERTC by working out the ERTC portion for each pay period and then lowering the requisite payroll payment by that sum.

You can then complete Form 7200 Advance Payment of Employer Credits Due to COVID-19 if you want the IRS to give you the ERTC in advance.

Rules for Advanced Payments

Small businesses (those with under 500 full-time workers) can get advance payments. Still, it can’t exceed more than 70 percent of the average quarterly salaries paid by the company in 2019.

An employer that didn’t exist in 2019 can also use it. The company can use the average quarterly salaries paid in 2020. You must also check the advance against the actual amount of ERTC, with a genuine up or down at the end of the applicable period.

Finally, in any calendar quarter where the amount of an employer’s OASDI tax is more than their ERTC payment, extra money comes back to them as a refundable overpayment. If you’re fortunate enough to receive a refund, you can add it to your tool chest to grow your small business.

Claim Your ERTC Today!

We hope you better understand the answer to the question, “What is ERTC tax credit? We also hope our guide has you excited about claiming your ERTC tax credit.

Why not start right now? This simple 60-second quiz can tell you the amount of your Employee Retention Tax Credit.

Please feel to start your assessment and book a free tax help consultation today by clicking here.