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What Is the Employee Retention Tax Credit or ERC?
Introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Employee Retention Tax Credit (ERTC), also known as the ERC tax credit, rewards businesses for continuing to pay employee wages during the COVID-19 pandemic. The value of this credit can significantly reduce payroll taxes, even for small businesses, making it far too lucrative to ignore.
This tax incentive remained in effect from March 12, 2020 to September 20, 2021 (or in some cases, December 31, 2021). Although no longer current, the refundable tax credit can be retroactively claimed through 2025.
The employee retention credit received updates in the Consolidated Appropriations Act as well as the American Rescue Plan Act. Due to these updates, the eligibility requirements for and value of the ERTC differ in 2020 and 2021. The American Rescue Plan Act also added special provisions for qualified recovery startup businesses.
Who Qualifies?
Both private-sector businesses and tax-exempt organizations that have been in operation since 2019 or earlier may be eligible for the ERTC. The specific eligibility requirements differ for 2020 and 2021 and depend on factors such as a decline in gross receipts and the impact of COVID-19 restrictions on business operations.
2020 Eligibility Requirements
To be eligible for the ERC incentive in 2020, a businesses must have experienced a 50% decline in gross receipts during any calendar quarter of 2020 (vs. the same calendar quarter in 2019). Additionally, businesses whose operations were fully or partially suspended due to COVID-19 restrictions put in place by a relevant governmental authority during any calendar quarter can qualify. Governmental restrictions include limitations placed on commerce, travel, group meetings, etc.
2021 Eligibility Requirements
ERTC requirements in 2021 include the same criteria pertaining to business operations limited by COVID-19 restrictions as were in place for 2020.
The second option for meeting ERTC requirements in 2021 entails a decline in gross annual receipts, with the minimum percentage of decline being lowered to 20% (down from 50% in 2020). Gross receipts in 2021 should be measured against those of the same calendar quarter in 2019. However, businesses that began operation in 2020 may use calendar quarters in 2020 as the comparison period.
Where to File ERC Tax Credit?
The Employee Retention Tax Credit should be filed with the IRS using Form 941-X for each quarter during which qualified wages were paid. It's important to note that even though the ERTC officially ended in 2021, eligible businesses can still claim the credit retroactively until 2025.
Recovery Startup Business
The American Rescue Plan Act introduced alternative 2021 ERTC requirements for “recovery startup businesses.” To qualify as a recovery startup business, a business must meet the following three criteria:
- The business began carrying out trade after February 15, 2020
- The business averaged annual gross receipts of $1,000,000 or less for 2018-2020
- The business is not otherwise eligible for the ERTC due to a full or partial suspension of operations or decline in gross receipts
If an employer meets all these requirements, they are eligible to claim the Employee Retention Tax Credit as a qualified recovery startup business.
More Than Nominal
Employers can still be eligible for the ERTC even if their business operations were not fully suspended by COVID-19 restrictions. So long as they can prove they experienced a more than nominal
partial suspension of operations, they may claim the credit.
Business suspension is considered more than nominal if the aspect of operations that was suspended made up more than 10% of the business’s total gross revenue for the same calendar quarter in 2019 or if employee work hours for the suspended portion of the business made up 10% or more of the total hours worked by all employees during the same calendar quarter in 2019. In other words, COVID-19 restrictions must have caused the business to experience at least a 10% decline in revenue or employee work hours.
Employee Retention Tax Credit Infographic
What Are Qualified Wages?
The value of the Employee Retention Tax Credit is dependent on the amount of qualified wages paid out during the applicable calendar quarter. As such, it is important to determine which wages do and do not qualify for the purpose of the credit.
Large employers and small employers each have different criteria for qualified wages. Additionally, the criteria by which a business is classified as large or small is different for 2021 than it is for 2020. These differences are outlined below.
Large Employers
An employer is classified as either large or small based on how many full-time employees it had in 2019. To be considered a large employer for the purposes of the ERTC in 2020, the employer must have averaged more than 100 full-time employees in 2019. For the 2021 ERTC, large employers are those which employed more than 500 full-time employees in 2019.
Qualified wages for large employers are only those which were paid during the specific period of time when COVID-19 restrictions partially or fully prevented the business from providing services. Any wages paid while business operations were not substantially restricted are not considered to be qualified wages—even if the employer met all requirements for that calendar quarter.
Small Employers
2020 ERTC guidelines consider a business to be a small employer if it averaged fewer than 100 full-time employees in 2019. 2021 guidelines increased the size cap to 500 full-time employees (still measured based on 2019 business records).
Qualifying wage requirements for small employers are less stringent than they are for large employers. Small employers may consider all wages paid out during a calendar quarter in which the business met requirements to be qualified wages.
How to Calculate ERC Tax Credit?
There are a number of factors to consider when determining the value of the Employee Retention Tax Credit. These include:
- Whether the business is classified as a small or large employer
- The calendar year and quarter during which the employer qualified
- Whether the business is considered a recovery startup business
The ERTC is calculated based on the amount of qualified wages paid during the time period in which the business was considered a qualifying employer. The credit can be claimed against the employer’s share of Social Security tax, and any amount exceeding this will be treated as an overpayment and refunded to the employer.
Rules for calculating the ERTC in 2020 and 2021 are outlined below:
2020 ERTC Calculation Rules
2020 ERTC requirements cap qualified wages at $10,000 per employee annually. The ERTC is worth 50% of total qualified wages, which means that the maximum value of the credit in 2020 is $5,000 per employee.
2021 ERTC Calculation Rules
The qualifying wage cap in 2021 was increased to $10,000 per employee quarterly. The credit amount was also increased to 70% of total qualified wages. Assuming a business qualified during all three eligible calendar quarters of 2021, the maximum value of the ERTC in 2021 would be $21,000 per employee.
Are Recovery Startup Businesses Limited?
It is important to note that recovery startup businesses are limited to $50,000 in credit per eligible calendar quarter. Because recovery startup businesses may only claim the ERTC for Q3 and Q4 of 2021, the maximum total value of the ERTC for recovery startup businesses is $100,000.
Can the ERTC Be Claimed Retroactively?
Even though the ERTC officially sunset on September 20, 2021 (or December 31, 2021 for recovery startup businesses), eligible businesses can still claim the credit retroactively. To apply for the Employee Retention Tax Credit, qualifying employers should file Form 941-X for each quarter during which qualified wages were paid.
Start The ERTC Claim Process Today
Interested in claiming the Employee Retention Tax Credit? As the nation’s leading specialty tax firm, Engineered Tax Services has had considerable experience helping clients claim the ERTC. Let us guide you through the bureaucratic labyrinth of applying for the credit so that you can enjoy the full economic benefits of this timely tax incentive!
FAQs
The Employee Retention Tax Credit (ERTC) rewards businesses for holding onto their staff throughout the COVID-19 pandemic. It can provide meaningful financial relief, even for smaller businesses. The ERTC value is derived from the qualified wages paid while the business meets the qualifying employer criteria. Should the credit go beyond the employer's Social Security tax share, it's refunded as an overpayment.
You do not have to pay taxes on ERC credits as the ERTC is a tax credit, not taxable income.
To report ERC credits on your tax return, you should file Form 941-X for each quarter during which qualified wages were paid.
Both private-sector businesses and tax-exempt organizations may be eligible to receive the ERTC. Organizations that have existed since 2019 or earlier and have participated in business during calendar years 2020 and/or 2021 should examine relevant ERTC requirements to find out if they qualify for this refundable tax credit. The eligibility requirements for the ERTC differ in 2020 and 2021 due to updates in the Consolidated Appropriations Act and the American Rescue Plan Act.
To claim the ERTC, qualifying employers should file Form 941-X for each quarter during which qualified wages were paid. Even though the ERTC officially ended on September 20, 2021 (or December 31, 2021 for recovery startup businesses), eligible businesses can still claim the credit retroactively.
The ERTC officially ended on September 20, 2021 (or December 31, 2021 for recovery startup businesses). However, eligible businesses can still claim the credit retroactively until 2025.
No, you do not have to repay the ERC tax credit. It's structured as a refundable tax credit, meaning any amount that goes above your total tax liability will be refunded to you.
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