What is ERTC? Claiming The Employee Retention Tax Credit Retroactively
The Employee Retention Tax Credit (ERTC) was passed to incent businesses to keep their employees on their payroll during the pandemic. Under the Infrastructure Investment and Jobs Act 2021, the ERTC program end date was September 30, 2021, although recovery startup businesses remained eligible to pay qualified wages through December 31, 2021. Luckily for many businesses, the benefits of the program didn’t end then. Employers can still take advantage of the Employee Retention Tax Credit retroactively. In fact, employers have up to three years from September 30, 2021, to determine if they have qualified employee wages paid to employees after March 12, 2020.
Since it may be challenging to know how to take advantage of the ERTC and the recovery startup credit, here we’ll cover how it’s calculated, who is eligible, and how to claim the credit retroactively. After reading this article, you’ll understand whether your business can qualify for the ERTC program and next steps for securing the much-needed relief.
What is ERTC?
The Employee Retention Tax Credit is a fully refundable payroll tax credit available to companies that partially or fully suspended their operations due to COVID-19 or had a significant decline in gross receipts compared to 2019. The credit allows employers to offset federal payroll taxes such as federal wage withholding and the employee’s share of Social Security and Medicare taxes.
Employers who received Paycheck Protection Program (PPP) loans may still qualify for the ERTC with respect to wages that are not paid for with forgiven PPP proceeds. Be sure to follow IRS guidance that recommends nonprofits and other employers maximize the amount of qualified non-payroll expenses (up to the 40 percent statutory limit) when applying for PPP loan forgiveness to ensure that excess payroll expenses can produce the greatest amount of the ERTC.
How does the Employee Retention Tax Credit Work?
Three pieces of legislation were created for the ERTC, and each one calculates the credit differently:
- CARES ACT 2020: For employers who qualify, including borrowers who took a loan under the initial PPP, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and December 31, 2020.
- Consolidated Appropriations Act of 2021: Qualifying employers, including employers that received PPP funds, can claim a credit against 70% of wages paid. The amount of qualified wages for the credit was increased to $10,000 per employee per quarter for the first two quarters of 2021.
- American Rescue Plan Act of 2021: The maximum credit is unchanged at up to 70% of qualified wages up to $10,000 per quarter. Employers can claim $7,000 per quarter per employee up to September 30, 2021. The Recovery Startup Business provision of this legislation extended eligibility for ERTC through December 31, 2021. A startup business may be eligible to take a credit of up to $50,000 for the third and fourth quarters of 2021.
What are the ERTC qualifications for eligibility?
Before you can claim the Employee Retention Tax Credit, you need to determine your eligibility. Since not all businesses are eligible, it’s important to understand the conditions.
Originally, you could only claim the credit if you were either fully or partially suspended by a lockdown order or your gross receipts in any quarter in 2020 were less than 50% of gross receipts for the same quarter in 2019. This provision prevented most businesses from qualifying for the ERTC, causing only a small fraction of companies to take advantage of the credit.
However, under the American Rescue Plan Act of 2021, it’s easier to be eligible since you now only need to show a decline in gross receipts of more than 20% for the same quarter in 2019. There are even certain rules that can allow you to take the credit if you weren’t in existence for all or part of 2019 and are a recovery startup business. The recovery startup business provision applies to companies that:
- opened a trade business after Feb 15, 2020, and
- have average annual gross receipts that do not exceed $1 million
Startup companies that meet these criteria are eligible to claim the credit even if they don’t meet the significant decline in gross receipts or suspension of operations test. The amount of ERTC available per employer under this provision is capped at $50,000.
How do I claim the Employee Retention Tax Credit retroactively?
Eligible businesses who meet ERTC qualifications can file a claim for a retroactive refund on previously paid qualified wages for past calendar quarters. To do this under the ERTC program, you’ll need to prepare and file Form 941X, Adjusted Employer’s Quarterly Federal Tax Return. For 2020 For 941 payroll tax filings, the deadline for that form is April 15, 2024; for 2021 941 payroll tax filings, it’s April 15, 2025.
It’s important to note that for retroactive claims for ERTC refunds, you may face significant delays in receiving funds from the IRS due to their current backlog in processing 941X returns.
Maximize Your Relief with Retroactive ERTC Claims
The Employee Retention Tax Credit program has evolved over time to enable more companies to be eligible for the credit. While this may benefit many businesses that may not have qualified initially, it can be challenging to understand ERTC eligibility and the process for claiming the credit. Before going at it alone, you may want to work with your accountant or payroll provider to help determine if you can take advantage of the program and maximize your relief if you do.
Note: Since the IRS has announced a moratorium on processing new claims, Complete Payroll Solutions cannot assist clients in claiming the credit until the suspension is lifted.