The Employee Retention Tax Credit (ERTC) is a refundable tax credit designed to help employers keep their staff during tough times, specifically the COVID-19 pandemic. It was first introduced in the CARES Act and extended through later legislation.
The ERTC gives eligible employers a break on their payroll taxes by covering a percentage of the wages they paid to employees during certain periods. To qualify, employers had to meet specific criteria, like seeing a sharp drop in revenue or facing a full or partial suspension of business due to government orders.
How does it work?
Here’s a quick breakdown of how the ERTC works:
- Eligibility: Employers must meet certain requirements, like a significant drop in revenue or a government-mandated shutdown due to COVID-19.
- Qualified Wages: These are wages paid to employees during the eligible periods. The definition of “qualified wages” changes based on the employer’s size:
- 100 or fewer full-time employees: All wages paid during the eligible period count.
- More than 100 full-time employees: Only wages for employees who weren’t working due to COVID-19 count.
- Credit Amount:
- For 2020: Employers could get 50% of qualified wages, up to $10,000 per employee for the year.
- For 2021: The credit went up to 70% of qualified wages, up to $10,000 per employee, but now it applies per quarter.
- Claiming the Credit: Employers can reduce their payroll tax deposits to claim the ERTC. If the credit exceeds the payroll taxes owed, they can request an advance payment from the IRS using Form 7200.
- Interaction with PPP: Employers who got a Paycheck Protection Program (PPP) loan can still claim the ERTC, but they can’t use the same wages for both the loan forgiveness and the ERTC.
- Documentation: Keep records of gross receipts, government orders, and wages paid to prove eligibility and calculate the credit.
Who is eligible for the ERTC?
Businesses and organizations that operated in 2020 or 2021 could be eligible, including:
- Private businesses and tax-exempt organizations.
- Employers who faced full or partial suspensions of business due to government orders.
- Employers with a significant drop in revenue:
- 50% decline in 2020 for any quarter compared to 2019.
- 20% decline in 2021 for any quarter compared to 2019.
Eligibility rules can be complex, so it’s always a good idea to check the IRS guidelines or consult a tax professional.
How to claim the ERTC
To claim the ERTC, follow these steps:
- Check Eligibility: Ensure your business qualifies based on the government orders or revenue decline.
- Calculate Qualified Wages: Identify the wages and health plan expenses you paid during the eligible periods. Remember, in 2020, the credit is 50% of up to $10,000 per employee for the year. In 2021, it’s 70% of up to $10,000 per employee each quarter.
- Reduce Payroll Tax Deposits: Claim the credit by lowering your payroll tax deposits, which include federal income tax withholding and your share of Social Security and Medicare taxes.
- File Form 941: Report the ERTC on your quarterly tax return. If the credit exceeds what you owe in payroll taxes, you can request a refund or advance payment using Form 7200.
- Keep Records: Maintain documentation, like gross receipts, government orders, and wage records, to support your claim.
Benefits of the ERTC
The ERTC provided major financial relief by reducing payroll taxes and encouraging employers to keep their employees during the pandemic. It also helped improve cash flow, which made it easier for businesses to survive tough times. For many businesses, it was a lifeline to help them retain workers when things were uncertain.
