The Employee Retention Tax Credit (ERTC) is a tax credit offered by the federal government to assist businesses in retaining their employees during economic hardships. This credit was introduced in 2020 as a response to the COVID-19 pandemic and has been extended until the last quarter of 2021. In this article, we'll provide a complete guide on the ERTC, including eligibility requirements, credit calculation and claiming procedures.
What is the Employee Retention Tax Credit?
The ERTC is a refundable tax credit designed to encourage businesses to keep their employees on payroll during economic hardships. The credit was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 to help businesses affected by the COVID-19 pandemic.
The Employee Retention Tax Credit can be a huge help for eligible employers, allowing them to claim significant credits against their share of Social Security taxes. If the credit amount is more than the Social Security taxes owed, employers can even receive a refund for the excess credit.
Who is Eligible for the Employee Retention Tax Credit?
To be eligible for the ERTC, businesses (including flow-through businesses such as Schedule C and partnerships) must meet the following criteria:
- Business Operations: The business must have been fully or partially suspended due to orders from a government authority, or the business must have experienced a significant decline in gross receipts.
- Business Size: For 2020, the ERTC was available to businesses with 100 or fewer employees. For 2021, the threshold was increased to 500 or fewer employees.
- Timeframe: For the 2020 tax year, the credit was available for wages paid between March 13, 2020, and December 31, 2020. For the 2021 tax year, the credit was available for wages paid between January 1, 2021, and December 31, 2021.
How is the Employee Retention Tax Credit Calculated?
The ERTC is calculated as a percentage of the qualified wages paid to eligible employees. For the 2020 tax year, the credit is equal to 50% of qualified wages, up to a maximum of $10,000 per employee. This means that the maximum credit available per employee is $5,000. For the 2021 tax year, the credit was increased to 70% of qualified wages, up to a maximum of $10,000 per quarter per employee. This means that the maximum credit available per employee for the entire year is $28,000.
How to Claim the Employee Retention Tax Credit
To claim the ERTC, businesses must report the credit on their employment tax returns. This can be done by filing Form 941, Employer's Quarterly Federal Tax Return. If the ERTC exceeds the amount of employment taxes owed, the excess can be claimed as a refund on Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Can the Employee Retention Tax Credit be Claimed Retroactively?
While the ERTC officially ended on September 20, 2021 (or December 31, 2021, for recovery startup businesses), eligible businesses can still retroactively claim the credit by filing an amended tax return. To claim the ERTC, employers must file Form 941-X for each quarter during which qualified wages were paid.
If you need to file an amended tax return for the second, third or fourth quarter of 2020 to claim the ERTC, the deadline to do so is April 15, 2024. For all three eligible quarters in 2021, the deadline to file amended tax returns is April 15, 2025.
- The ERTC can be claimed in addition to the Paycheck Protection Program (PPP) loan, but not for the same wages.
- The ERTC is not available to state or local governments or their instrumentalities, nor to small businesses that have received a shuttered venue grant.
- The ERTC is subject to recapture if the employer receives a forgiveness of a PPP loan.
Engineered Tax Services, the nation's leading specialty tax firm, has a proven track record of assisting clients in obtaining the Employee Retention Tax Credit. Our tax experts are well-versed in the ERTC’s intricacies, including all current regulations and required documentation.
Our services go beyond merely helping you complete the necessary paperwork. We’ll work with you to determine your eligibility for the ERTC and to identify any missed opportunities for tax credits and deductions. By leveraging our expertise, you can maximize your financial benefits and ensure that you receive the full amount of the tax credit for which you qualify. Contact us today to learn more.