What is Employee Retention Tax Credit (ERTC)?
Title: Navigating the Employee Retention Tax Credit Landscape
Overview of Employee Retention Tax Credit
The Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit (ERTC), emerged as a lifeline for businesses amid the COVID-19 pandemic. Initially introduced in March 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERC evolved through subsequent updates to support businesses in overcoming pandemic-related challenges.
However, in November 2021, the ERC program expired with the enactment of the Infrastructure Investment and Jobs Act. Despite this, businesses can still retroactively claim the credit for up to three years by amending their 2020 or 2021 tax returns, offering continued benefits to small and medium-sized enterprises.
How Much Is the Employee Retention Tax Credit?
The ERC is a refundable tax credit, initially set at 50 percent of qualified wages and later expanded to 70 percent. The credit applies to wages paid between March 13, 2020, and September 30, 2021, with an increased cap of $10,000 per employee per quarter for the first three quarters of 2021. This allows businesses to claim up to $7,000 per employee per quarter, totaling up to $21,000 in 2021.
Qualified wages vary based on the number of employees:
- Businesses with 500 or Fewer Employees:
- Can count all employees on the payroll, regardless of their working status during the pandemic.
- Eligible for up to $10,000 in wages for all of 2020 and up to $10,000 in wages per quarter for the first three quarters of 2021.
2. Businesses with More than 500 Employees:
- Can only count wages of employees who weren’t working due to pandemic-related issues.
- Eligible for up to $10,000 in wages for all of 2020 and up to $10,000 in wages per quarter for the first three quarters of 2021.
The ERC program was updated to encompass 70 percent of qualified wages, making it a valuable resource for businesses aiming to mitigate pandemic-related financial challenges.
Who Qualifies for the Employee Retention Credit?
Businesses across all sizes and industries qualify for the ERC if they experienced:
- Full or partial suspension of operations due to COVID-19-related government restrictions.
- Significant decline in gross receipts, with a 50 percent reduction for 2020 and a 20 percent reduction for a single quarter in 2021 compared to the same period in 2019.
Sole proprietors and government entities are ineligible, and initially, businesses receiving Paycheck Protection Program (PPP) loans were excluded. However, subsequent changes allowed PPP loan recipients to qualify, although they cannot claim the ERC for the same wages used for PPP forgiveness.
How Do I File for the Employee Retention Credit?
To claim the ERC, eligible employers report qualified wages and health insurance costs on their quarterly employment tax returns, typically using Form 941. Employers can retain the employment taxes they would have filed, providing immediate relief by reducing initial employment tax payments.
Filing retroactively can be done using Form 941-X, allowing businesses to claim the credit through 2024 for wages from the 2020 tax year and the first three quarters of the 2021 tax year.
Is the Employee Retention Credit a Loan?
No, the ERC is not a loan; it is a grant or credit that reduces employment taxes. As long as the credit is calculated and filed correctly, businesses do not need to repay it or face penalties. Unlike some pandemic relief forms, such as PPP loans, the ERC provides financial support without the obligation of repayment.
For a thorough understanding and accurate filing, businesses are advised to consult with their accountants and payroll specialists.