The Small Business Guide to the Employee Retention Tax Credit

Employee Retention Tax Credit
Table of Contents

The plan sounds almost too good to be true—keep your employees on your payroll and receive a 50% to 70% payroll tax credit from the federal government. The Employee Retention Credit (ERC) is real and allows businesses to receive a refundable credit for payroll taxes they collect from qualified employees between March 13-October 1, 2021.

The ERC is part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The act’s purpose is to assist businesses by providing relief that allows them to retain employees on their payroll. This includes periods when the employee is not working because of the coronavirus outbreak.

If you are seeking additional information or need help applying for the IRS employee retention credit, read on. We are going to provide you with everything your business needs to know about this tax credit in 2022, including how to file a retroactive claim.

The Application Process

If you and your employees are pulling out your hair trying to find the Employee Retention Tax Credit (ERTC) application without success, there is a good reason for your failure—there is no special application. That doesn’t mean there aren’t rules and regulations, calculations to be done, and changes to be aware of.

To receive your employee retention credit, you use the following forms:

  • Employer’s Quarterly Federal Tax Return, Form 941
  • Advance Payment of Employer Credits Due to Covid-19, Form 7200
  • Reporting Agent Authorization, Form 8655
  • PPP Application and Forgiveness, when applicable

Under the original ERTC portion of the CARES Act, employers could not apply for both a Paycheck Protection Program (PPP) loan and ERC. For this reason, the majority of businesses did not apply. Only 8% of business owners took advantage of this credit in 2020, and only 10% in 2021.

Because it is part of the payroll process, the filing is more frequent than when filing on a standard income tax return. Instead of claiming this credit on your annual return and waiting for a refund, you receive the credit immediately.

This is done by applying it against the payroll taxes you normally send to the Internal Revenue Service. If the credit due you is larger than your payroll taxes, you may apply to receive a refund from the IRS. Your business can also apply for an advance against the credit.

Recent changes mean you can now qualify for ERC with a PPP. You have three years to apply retroactively for the ERTC.

What Is the Employee Retention Credit?

As of January 1, 2021, the ERC/ERTC provides businesses with a refundable and advanceable tax credit of up to $14,000 per qualifying employee. It also forgives Paycheck Protection Program (PPP) loans of up to $2 million.

The updated and current employee retention credit provides your business with a refundable credit of up to $5,000 per full-time equivalent employee on your payroll between March 13-December 31, 2020. For employees on payroll from January 1-September 30, 2021 you can receive up to $14,000 per employee.

Qualifying for the Employer Retention Tax Credit

There are different levels of the employee retention tax credit, and it has gone through several revisions since its introduction. If your business was ineligible when the plan was introduced, you need to undergo a review of your wages from 2020 and 2021. Many businesses that did not originally qualify can file for retroactive reimbursement.

In Spring 2020, it was necessary for businesses to make a choice between receiving a PPP loan or employee retention credit. This restriction no longer exists, and you can take both for 2021.

If you were self-employed during the eligibility period, you do not qualify for ERC on your own wages. If you had other people working for you, you may be able to take the credit as long as those people meet employee qualifications.

Employer Qualifications

Businesses that qualify have 500 or fewer employees and more than a 20% decline in their gross receipts. The determination is made by comparing receipts from the same quarter in 2019 with those in 2020 or 2021.

The plan is also available to businesses will less than 300 employees that have exhausted their first PPP loan. These businesses must have a 20% decline in gross receipts per quarter.

You meet employer qualifications if you were ordered to shut down either partially or fully due to COVID-19. The shutdown must result in gross receipts falling below 50% during 2020 in comparison to the same quarter in  2019. When filing for 2021 your gross receipts must be below 80% of what they were in 2019.

If you were not in business during the 2019 calendar year, you will need to compare with the same quarter from 2020.

Qualification determination is tricky because you must make sure you meet qualifications for both the business and each employee you claim.

Employee Qualifications

The number of full-time employees you can claim credit for depends on the average number working full-time in 2019.

During 2020, if you had an average of 100 or more full-time employees, you may only claim wages for those employees not working. If you have 100 or fewer employees, you will be able to claim wages for 100% of your workforce. This applies whether or not the employees are working.

During 2021 the threshold increases to 500 full-time employees. If you have more than 500 people, you can only claim ERC on those not working. If your employee count is below 500, you can claim ERC on all of them regardless of their work status.

You can’t just count the number of people you employ.  You have to make sure each person meets IRS qualifications. These are shown under IRS FAQ 59. The IRS considers the following ineligible relationships:

  • Owner and spouse
  • Child and decedent of a child
  • Sibling and stepsibling
  • Parents, ancestors of parents, and stepparents
  • Nieces and nephews
  • Aunts and uncles
  • Son-in-law, daughter-in-law
  • Father-in-law, mother-in-law
  • Brother-in-law, sister-in-law

You are unable to claim any employee who is ineligible.

Additional Qualification Standards

As part of the qualification process, the CARES Act mandates you are unable to receive ERC for:

  • Wages you receive a tax credit for under the Families First Coronavirus Response Act (Phase II)
  • Wages counted as credit for Internal Revenue Code § 455 family and medical leave
  • Wages you pay to related individuals
  • Employees you receive a Work Opportunity Tax Credit for under Internal Revenue Code § 51

The CAA 2021 extends the prohibitions to wages you pay under:

The best way to make sure you meet all qualifications and do not make any costly mistakes is to have a professional company that specializes in ERC review your records. They can answer questions and assist with obtaining your credit.

Amount of Credit

The amount of credit you may receive varies for each year. It is important to make sure you read all qualification requirements and stay current on changes. Many updates change qualifications retroactively.  

2020 Credit

In 2020, you can receive 50% for a maximum of $10,000 in qualifying wages. This includes amounts paid toward employee health insurance.

You can receive credits for each qualifying full-time employee in eligible calendar quarters between March 13-December 31, 2020. The maximum you may receive is $5,000 per employee. The business no longer qualifies when gross receipts exceed 80% of the gross receipts for the same quarter in 2019.

The credit applies to the business portion of the employee’s Social Security tax and the amount is fully refundable. The credit works like an overpayment. It is refunded to you after you subtract your share of the taxes.

Calculate the amount of your credit and reduce your Employer’s Quarterly Federal Tax Return, Form 941 deposit by your qualifying amount.

If you qualify for a $10,000 credit and your normal deposit is $15,000, simply reduce the deposit by your $10,000 credit. You deposit $5,000 with the U.S. Treasury and account for the credit on Form 941.

If your business receives a PPP loan in 2020 you can still claim ERC. If you place wages paid on a forgiveness request and receive a denial, you can claim those wages on your fourth quarter Form 941. This requires several steps:

  • Include the amount of qualifying wages paid in the 2nd and 3rd quarter, wages paid in the 4th quarter, plus health care expenses paid, on line 21 of your fourth quarter Form 941
  • Enter this amount on worksheet 1, step 3, line 3a
  • Include 2nd, 3rd, and 4th quarter health plan expenses on line 22 of 4th quarter Form 941
  • Enter this amount on worksheet 1, step 3, line 3b

Instead of this extensive process, you can file an adjusted return or claim for a refund using Form 941-X

2021 Credit

In 2021, you can receive up to 70% of a maximum of $10,000 in qualifying wages. This includes employee health insurance payments.

This credit applies to every full-time employee for eligible calendar quarters between January 1-June 30 2021. The maximum allowable credit is $14,000 per employee or $7,000 per quarter.

The credit is applicable to the business portion of the employee’s Social Security taxes and the amount is fully refundable. The credit serves as an overpayment and is refundable after subtracting your portion of those taxes.

The process for receiving the credit is similar to the steps for 2020. You need to consider the changes made by the CAA. Receive your 1st and 2nd quarter credits by reducing your payroll tax deposits.

If you have 500 or fewer employees you can request an advance credit payment. Make the request by filing an Advance of Employer Credits Due to Covid-19, Form 7200. Advances are not available for employers with more than 500 employees.

Laws Impacting the Employer Retention Tax Credit

The Consolidated Appropriations Act (CAA) 2021 and the American Rescue Plan Act (ARPA) extend and amend the availability of credits and payments through 2021. This includes changes to eligibility for businesses receiving a Paycheck Protection Program (PPP) loan.

The CAA increases the credit available to 70% for wages paid through the end of 2021. This includes health insurance costs. The credit covers a maximum of $10,000 in wages paid per quarter per employee for quarters one and two of 2021.

Title VI—Other Provisions, § 80604 of the Infrastructure Investment and Jobs Act affects the termination of ERC for employers experiencing closure due to Covid-19. Part of these changes includes moving the deadline from January 1, 2022, to October 1, 2021. 

The only exception to the deadline change is startup recovery businesses. Those businesses remain at the original January 1, 2022 deadline.

Gross receipts reduction and business closures were also removed from the qualifications of recovery startups. In the 4th quarter of 2021, all recovery startups are eligible for ERC.

By removing the 4th quarter of 2021, most businesses suffer a severe impact. This includes reducing the maximum amount of credit those businesses receive from $28,000 to $21,000.

Avoid Tax Penalties for 4th Quarter ERC Advance Payments

Businesses suffering the impact of the 4th quarter ERC elimination for 2021 can avoid tax penalties. You need to repay the amount by the due date on your employment tax returns. If you did a reduction in your tax deposits prior to December 20, 2021, you can avoid the penalty for retaining deposits if:

  • In accordance with IRS rules reduced your deposits anticipating ERC
  • Deposit the retained amount on or before the due date for wages paid on December 31, 2021, regardless of whether the employee receives wages that day
  • Report the tax liability from the end of ERC on the appropriate tax return or schedule including the October 1-December 31, 2021 period

It is imperative you follow all instructions on your employment tax return or schedule regarding the filing of reports. If your business does not qualify for relief, you must respond in a timely fashion to any penalty notices. 

Get Your Employee Retention Tax Credit in 2022

With the numerous changes, exemptions, additional qualifying factors, and more, determining whether or not you qualify for an employee retention credit can be confusing. The last thing you need is to make a mistake that results in IRS penalties.

Save yourself the headache of analyzing all the rules, regulations, and qualification changes by contacting ERC Today. We specialize in the CARES Act, employer retention tax credit, tax consulting, and tax filing options.

We will review your records and answer all your questions. We will help you file the employee retention credits you qualify for in 2022.

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