Key takeaways:
- The employee retention credit came about in 2020 as part of the CARES Act and allows qualifying employers to get up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021
- There is still time to claim the ERC if you qualify but haven’t yet claimed it, even though the credit period ended in 2021
- You have three years from the date you filed your initial payroll tax return to claim the ERC using Form 941-X
Government regulations can be confusing and intimidating, especially with constantly changing rules and deadlines. This applies to business tax credits, including the employee retention tax credit (ERC or ERTC).
The ERTC deadline has change several times since was introduced, starting with December 31, 2020, then extending to the end of 2021, then changing back to September 30, 2021. There are also qualification changes and clarifications to keep track of.
Despite the benefits to your business, the National Federation of Independent Business (NFIB) discovered that only 4% of small business owners are familiar with the ERTC program. Only 8% of owners used ERTC in 2020 and 10% in 2021. The ERC can mean thousands of dollars in a credit to help your business. It was created to help employers through the hardships of the COVID-19 pandemic.
What do all the employee retention credit deadline and rule changes mean for your business? Can you still claim the credit by the ERC deadline in 2022 or 2023? What changes were made to the ERC for 2022 or 2023, if any?
This guide walks through frequently asked questions about the ERC, including who qualifies, how the deadline to apply works, how to apply for the ERC in 2023, what documents you’ll need to apply, and much more.
What Is the Employee Retention Tax Credit?
First, let’s cover the basics of how the ERTC came about and why it was created. The Coronavirus Aid, Relief, and Economic Security (CARES) Act developed the ERTC.
The CARES Act became law in March 2020 and aimed to help businesses keep employees on the payroll. The ERC was introduced as part of a major relief package to support Americans through the toughest quarters of the pandemic.
Other laws impacting the act include the Consolidated Appropriations Act 2021 (CAA) and the American Rescue Plan Act (ARPA). Both acts amended and extended credits and advance payments through most of 2021.
Under the initial ERTC, small to mid-size businesses were eligible to receive up to 50% of qualifying wages paid from March 12 to December 31, 2020. This now includes employers receiving a loan under the Paycheck Protection Program (PPP).
The maximum credit is $10,000 in wages per employee for 2020. So, in 2020, eligible businesses can claim up to $5,000 per employee for the year.
The CAA increased the tax credit to 70% for employee wages paid through 2021, including some health insurance costs. A further act ended the credit earlier, on September 30, 2021.
The ERC has a maximum of $10,000 in wages per employee per quarter during the first three quarters of 2021. For 2021, then, eligible businesses can claim up to $7,000 per employee per quarter, or $21,000 for the year.
Recovery startup businesses can claim the credit through the end of 2021, however, so all four quarters – this puts them at a limit of $28,000 per employee per year for 2021. Recovery startup businesses are those that began operations after February 15, 2020, and have less than $1 million in annual gross receipts.
Congress passed the Infrastructure Investment and Jobs Act on December 2, 2021. One section of the Act revised the covered period through September 30, 2021, except for recovery startup businesses.
Recovery startups were no longer subject to gross receipts reduction or business closure to qualify. All recovery startups are now eligible for wages paid in the fourth quarter of 2021.
This elimination of the fourth quarter of 2021 impacts most businesses by reducing the maximum credit eligibility amount from $28,000 to $21,000, which is a significant jump.
How to Qualify for the Employee Retention Credit
Determining eligibility for the ERTC is based on an employer’s 2019 records. Businesses with 500 or fewer employees during 2019 may qualify. Gross receipts in a 2020 quarter must be at least 50% lower per quarter than the same quarter in 2019, and gross receipts in a 2021 quarter must be at least 20% lower than the same quarter in 2019.
Businesses with 100 or fewer full-time employees could initially qualify for the 100% employee wage credit. This is applicable whether the business is open for business or subject to a shutdown order. Companies with more than 100 employees would qualify if they paid employee wages when not providing services due to COVID-19 circumstances.
These numbers were changed when the definition of a “large employer” was revised, however. The threshold was raised from more than 100 employees to more than 500, so more employers now qualify for the full ERC.
Qualifying businesses must have met one of these requirements in 2020 or 2021:
- A full or partial shutdown of operations because of government limits on commerce and shutdowns during the COVID-19 pandemic
- Gross receipts of at least 50% less in 2020 or 20% in 2021 when compared to the same calendar quarter in 2019
The recovery startup businesses must also have to have launched after February 15, 2020, with annual gross receipts of $1 million or less with an ERC cap of $50,000.
8 FAQs about the ERC
Businesses may not know they could have claimed the employee retention credit in 2022 and can still do so this year. Providing the answers to a few frequently asked questions about the ERC will help you determine whether you can still apply. Here are eight ERC questions with answers from the experts:
1. Can I Claim the ERC in 2023?
You can still claim the credit in 2023 if your business recovered from a substantial decline in gross receipts and you did not already claim the credit. Businesses have three years from the date of their original tax return filing or two years from the date the tax was paid, whichever was later, to file for the ERC. You still have time to look back at the wages you paid to employees after March 12, 2020, to determine eligibility.
2. When Is the ERTC Deadline?
The ERTC deadline will vary based on when you submitted your tax returns. Businesses have three years from the date they submitted their original payroll tax returns to look back at wages to determine eligibility.
Make sure you act quickly once you realize you qualify for the ERC. You don’t want to miss your window and thus miss out on potentially thousands of dollars to help support your business.
The program ended on September 30, 2021, for most businesses, but remember that the Infrastructure Investment and Jobs Act notes an exception for wages paid by a recovery startup business. The original January 1, 2022, deadline remains in place for those businesses.
3. What Is the Safe Harbor from the IRS?
The IRS release of Revenue Procedure 2021-33 on August 10, 2021, provides a safe harbor for employers. This allows employers to exclude the amount of:
- Forgiveness of a PPO loan
- Amount of a Shuttered Venue Operators Grant
- Amount of a Restaurant Revitalization Fund Grant
These funds do not need to be part of gross receipts when determining eligibility to claim ERTC. You must apply for the safe harbor across all entities.
4. How Can I Apply for the Employee Retention Tax Credit in 2022 or 2023?
You can file for the employee retention tax credit in 2023 if you haven’t already. This is known as filing for the ERC “retroactively.” You can do this by submitting an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, Form 941-X. This is an amendment to your original payroll tax return, Form 941.
5. How Does the Employee Retention Tax Credit Work?
Various factors go into calculating the retention credit. Qualifying wages must be paid between March 12, 2020, through September 30, 2021 (December 31, 2021, for recovery startups). The credit is only applicable to wages not forgiven under PPP.
Determining health expenses that qualify depends on specific circumstances. This includes employee and employer pretax portions, not after-tax amounts.
Businesses must monetize the credit for every payroll period by filing a quarterly payroll tax return using Form 941. The business monetizes the credit by retaining the payroll taxes it withholds from employee wages.
Businesses that pay out $100,000 in payroll can expect a $70,000 credit – with ERTC, they keep the payroll taxes as a credit advancement. The company can use that money for business operations.
Early termination of the ERC means businesses now owe the government payroll taxes withheld for the 2021 fourth quarter. The company is subject to a 10% penalty if they fail to deposit payroll taxes.
6. What ERTC Filing Documents Do I Need?
There are several documents and forms that need to be prepared. The most important form is Form 941, the Employer’s Quarterly Federal Tax Return.
This is the form you use to report all wages paid to employees during the quarter, as well as any deferred compensation, income tax withholding, and Medicare taxes withheld from employees.
Preparing to pay payroll taxes should be an ongoing, year-long process. Employers should also prepare a copy of their most recent payroll records so they can accurately calculate the total wages paid to eligible employees who qualify for the ERTC.
In addition to Form 941 and payroll records, employers must submit a statement verifying the number of employees they employed during the period in question, along with any applicable employment tax information.
This can include Forms W-2 or 1099-MISC, if applicable, or other documents that verify employee status, such as a copy of each employee’s driver’s license or social security card. Employers should also submit copies of any payroll stubs or paychecks for the period in question to indicate how much each eligible employee was paid.
Provide any additional supporting documentation as well, such as records of how wages were paid (direct deposit or check), evidence of how many hours employees worked per week before and after the business closure or significant decline in gross receipts due to COVID-19, and proof that furlough periods have been accounted for when calculating wages paid.
Employers must also provide a written statement certifying that they have met all eligibility requirements as part of the ERTC filing and application process to receive the credits.
Businesses must also submit a signed copy of Form 5884-C with their application for the ERTC filing to be processed properly by the IRS. This form provides additional information about how much credit is being requested and where it should be applied on future quarterly returns.
Businesses must ensure all required documents are included with their application – otherwise, the IRS may not process their application correctly, and their request for credits may not be approved. Work with a tax expert, such as a tax attorney, when you’re unsure how to apply for the employee tax credit in 2022 or 2023.
7. Am I Still Eligible in 2023?
Despite the expiration date of October 1, 2021, you can still take advantage of the employee retention tax credits in 2022 and 2023 if your business is eligible.
You may file for a retroactive ERTC refund if you didn’t previously file for the credit. Submit an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, Form 941-X, to file retroactively. There is a three-year deadline from the date of your original filing.
8. What Is IRS Notice 2021-49?
Notice 2021-49 from the IRS provides guidance on the ERC for employers paying qualified wages, covering the ERC for 2020 and 2021. The ARPA made changes to the ERC that cover 2021 for the third and fourth quarters, including the updated qualifying periods, adding “recovery startup businesses” in the definition of eligible employers, and modifying the definition of “severely financially distressed employers” qualifying wages.
The ERC does not apply to payroll wages paid in connection with §324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. It also does not apply to §5003 restaurant revitalization grants under the ARPA.
The notice clarifies questions that the Treasury Department and IRS have been fielding regarding 2020 and 2021 ERC credits, including:
- How to treat tips under qualified wages and interaction with §45B credit
- Defines full-time employees and full-time equivalents
- Wages paid to majority owners and spouses
- Timing of the qualified waged deduction disallowance
The notice also advises whether a taxpayer needs to file an amendment using an adjusted employment tax return.
The employer may receive an advance payment from the IRS if a reduction in the employment tax deposits does not cover the credit. File the Advance Payment of Employer Credits Due to Covid-19, Form 7200, to receive an advanced payment.
All IRS Notice 2021-49 clarifications apply to the entire period before the ERTC filing deadline. You must file amendments to Form 941 (with Form 941-X) if you determine wages were miss-categorized as qualifying for ERTC.
The ERC has seen many changes since it was created in 2020, with subsequent legislation and IRS guidance. Remember, the ERTC 2020 deadline is not up yet – you can still file for that year or for the ERTC in 2021. You have three years from the date you filed your original tax return using Form 941, and you can use Form 941-X to amend your return and claim the ERC.
Get Your Employee Retention Credit in 2023 with ERC Today
Trying to understand whether your business qualifies for the employee retention tax credit in 2022 or wondering about filing retroactive or amended returns may have your head spinning. Contact ERC Today – we can answer your questions and assist you with the employer retention tax credit, CARES Act, tax consulting, and filing options.
Don’t wait or assume you can no longer claim the ERC. This is a major credit that will significantly impact your business as you move forward from the pandemic. Contact ERC Today now to make sure you receive all credits your business qualifies for.
