The Employee Retention Tax Credit (ERTC) provides valuable financial incentives to businesses that continued to pay their employees during the COVID-19 pandemic. The credit can put money in your pocket, but unfortunately, it can be difficult to find reliable information on this credit and how to claim it.
The IRS has multiple posts about this credit on its website, but many of the posts are outdated or confusing. A lot of information also seems to be buried in pdfs or hidden in the instructions for tax forms.
This happened because the government created the credit but then drafted legislation that made many changes to it. Some of the changes were even retroactive, causing even more confusion.
Many people have questions about the ERTC, and unfortunately, it’s hard to find answers. This guide to ERTC FAQs is designed to help you out. It provides comprehensive, up-to-date answers to the most common questions about the ERTC. Here’s what you need to know.
ERTC FAQs About Eligibility Requirements
Only some businesses are allowed to claim this credit. You must meet strict criteria to qualify for the ERTC. Here is a look at commonly asked questions about the credit’s eligibility criteria.
Who Qualifies for the ERTC Credit?
Businesses can claim this credit if they experienced a significant drop in revenue due to COVID-19. They can also qualify if they had to close their business or suspend critical operations.
They must have experienced these issues between March 12, 2020, and September 30, 2021, and must also have paid wages during that time. Eligible recovery start-up businesses can also claim the credit for wages paid during the last quarter of 2021.
Can Any Size of business Qualify for the Credit?
The number of employees you have affects your eligibility for the credit. Only businesses with fewer than 100 full-time-equivalent (FTE) employees in 2019 can claim the 2020 credits. Businesses can claim the 2021 credits if they had fewer than 500 full-time employees in 2019. Employers that weren’t in business in 2019 can use their 2020 employee numbers.
What if Your Business’s Number of FTE Employees Is Over the Threshold?
Businesses over the threshold for the qualifying number of employees can claim the credit if they paid employees who were not providing services. This comes into play when businesses sent employees home but still continued to pay them.
Is a Minimum Number of Employees Required to Qualify for This Credit?
No. There is no minimum number of employees that you need to qualify for this credit. You can claim this credit if you only have a handful of employees or even just a single employee.
What Wages Qualify for the ERTC?
You can claim the credit on wages or eligible health care expenses up to $10,000 for 2020 and up to $10,000 per quarter for 2021. The credit is 50% of eligible wages for 2020 and 70% of eligible wages for 2021. This means that the credit can be worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021.
What if Your Business Is Severely Financially Distressed?
The IRS considers your business severely financially distressed if your revenue dropped to 10% of what it was for the same quarter in 2019. Severely distressed businesses can treat all wages paid in the third quarter of 2021 as qualifying wages.
These businesses don’t have to worry about the $7,000 cap per quarter. They can apply this credit to all wages paid during the third quarter of 2021, as long as their revenue dropped by at least 90%.
Can You Claim the ERTC on Business Owner Wages?
You can claim the ERTC on a business owner’s wages if the owner owns less than 50% of the company. Married couples who run a business together must jointly own less than 50% of the business if they want to claim this credit on their wages.
The credit can only apply to wages. It doesn’t apply to owner draws or other payments.
Can You Claim the ERTC on Wages Paid to Family Members?
You cannot claim the ERTC on wages paid to your minor children unless you own less than half of the business. There may also be restrictions on claiming this credit on other wages paid to family members.
Can You Claim the ERTC on Payments Made to Freelancers?
No, the ERTC only applies to wages paid to employees. You cannot claim this credit on money paid to freelancers, independent contractors, or anyone other than a W2 employee, and you withhold Social Security and Medicare from their paychecks.
How Much Does Your Revenue Need to Drop to Claim the ERTC?
You can claim the ERTC based on reduced revenue if your 2020 revenue was 50% or less than your revenue during the same quarter of 2019. You can continue to claim the credit until you reach a quarter where your revenue is at least 80% of your revenue for the same quarter in 2019.
Eligibility for the 2021 credit only requires your revenue to drop to 80% or less than the same quarter in 2019. Businesses that weren’t operating in 2019 can use 2020 numbers as a comparison for 2021.
How Do Multiple Locations Affect Eligibility?
You should count all of your locations as a single business. Each location doesn’t need to experience a decline in revenue. There just needs to be an overall drop in revenue.
What if Only One Location Had a Qualifying Drop in Revenue?
You need to aggregate sales across all your locations to calculate your eligibility for this credit. The only way you can claim this credit for a single location is if that location is its own business.
Can I Get the ERTC if My Revenue Didn’t Drop?
You don’t have to have a drop in revenue to qualify for the ERTC. You can also qualify for this credit if you were forced to shut your business or suspend operations due to government orders during COVID-19.
The shutdown could have been complete or partial. It should have affected 10% of your operations or 10% of your staff for it to qualify you for the ERTC.
Can New Businesses Claim the Credit?
New businesses have slightly different eligibility criteria for this credit. Businesses that opened after February 15, 2020, and have less than $1 million in gross annual sales, can claim this credit for the last two quarters of 2021, whether they had a drop in revenue or not. These businesses qualify even if they didn’t need to close down or suspend operations.
Businesses could claim these credits when filing their employment tax returns, but if you didn’t claim them in 2020 or 2021, you still have time. Qualifying businesses can claim the ERTC retroactively. The following section covers questions about the application process.
FAQs About How to Apply for the ERTC
You can claim the ERTC retroactively by amending your employer tax forms. You simply need to find the form that you usually file, followed by an X. Most employers file Form 941 (Employer’s Quarterly Federal Tax Return), so they can amend it by filing Form 941-X.
Employers who use the annual return should file an amended version of that form. Here are FAQs to help guide you through the application process.
What Is the Deadline to Claim the ERTC?
You can amend tax returns for a refund for up to three years from the original due date for the return. You must meet this deadline if you want to get a refund for this credit.
The alternative deadline is two years from the date you paid the tax. This deadline only comes into play in situations where you paid the tax significantly later than you filed the return.
How Will I Receive the Employee Retention Credit?
The IRS will send you a paper check after processing your credit. You cannot opt for a direct deposit.
You also can’t use the credit to reduce your payroll deposits. You should keep making payroll deposits and filing employer forms as usual when you apply for this credit.
What Do I Need to Apply for the ERTC?
You need your payroll reports and copies of the employer tax returns you filed in 2020 and 2021. You also need your bookkeeping or sales records to establish that you had a drop in revenue.
You can use notes or other documents as proof that your operations were suspended due to COVID-19. An ERTC specialist can tell you exactly what you need when you contact them for help.
What Is the Maximum Amount of the ERTC for Most Businesses?
The maximum amount of the credit varies depending on how much you paid employees and your type of business. The maximum credit for 2020 is $5,000 per employee.
The maximum credit for 2021 is $21,000 per employee for most businesses. That is $7,000 per employee per quarter for the first three quarters of the year.
What Is the Maximum Amount of the ERTC for Start-Up Recovery Businesses?
Recovery start-up businesses can claim the credit for all four quarters of 2021. That means their maximum credit can be $28,000 per employee for 2021, but regardless of how many employees they have, their credit also maxes out at a total of $50,000 per quarter for the last two quarters of 2021.
Do PPP Loans Affect the ERTC?
You can still claim the ERTC if you received a Paycheck Protection Program (PPP) loan. You cannot, however, count wages that you paid with the PPP loan. The employee retention credit can only apply to wages that weren’t paid with a PPP loan.
Do Loans Count as Revenue When Determining Eligibility for This Credit?
You should not count PPP loans or any other loans as revenue when determining if you’re eligible for this credit. Loans help you stay afloat, but they are not business revenue.
Do You Pay Taxes on Money Received from the Employee Retention Credit?
You do not have to pay taxes on the money you receive from the ERTC. This money is a tax refund. It is not income. This refund, however, does have tax consequences, and you may need to update your 2020 or 2021 business tax return after you receive this credit.
How Does the ERTC Affect My Business’s Income Tax Return?
The ERTC reduces the amount you pay to the government for employer taxes. This means that it reduces your total wage expense for the year. Reducing this deduction increases your profit for the year, or if you had a loss for the year, it reduces your loss.
You may need to amend your 2020 or 2021 business tax returns to reflect your reduced wage expense. This may lead to an increased income tax bill for your business. This tax increase, however, will be significantly lower than the credit you receive.
When Will I Receive the ERTC?
The processing times for the ERTC vary. The IRS is very backlogged at the time of this writing. The agency has millions of employer tax returns that it hasn’t processed yet, which is delaying the processing of amended returns and refunds.
The ERTC can be confusing. The important thing to remember is that there are specialists who can answer your questions and help you apply for this credit. You don’t have to deal with this credit on your own.
Concluding Our ERTC FAQs: Reach Out for Help You Need Today
ERC Today focuses on helping employers get the ERTC. We can help you assess if you qualify, and then we can help you get together everything you need to apply for this credit.
Don’t let this opportunity pass you by. This is a risk-free, legitimate way to put money back into your pocket and get some retroactive relief from the financial distress of the COVID-19 pandemic.
Contact ERC Today for more information about your Employee Retention Credit options.