Key Takeaways:
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- COVID-19 legislation, like the CARES Act, introduced business relief like the employee retention credit (ERTC) and the paycheck protection (PPP) program.
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- The ERTC allows qualifying businesses to receive a refundable credit of up to $5,000 per employee per year in 2020 and up to $21,000 per employee per year in 2021.
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- Key eligibility requirements for the ERTC include either a decline in gross receipts when compared to 2019 performance or a business closure because of a government order.
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- Qualifying businesses can claim the ERTC for up to three years after the original tax return filing date.
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- Five steps to apply for the ERTC retroactively:
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- Use Form 941-X
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- Add up your qualified wages
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- Calculate your ERTC
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- Claim an advanced refund
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- File before it’s too late
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- Five steps to apply for the ERTC retroactively:
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- Businesses will still be able to get PPP loan forgiveness and look into other programs from federal and local governments.
Small businesses around the nation felt the devastating impacts of the COVID-19 pandemic, and many continue to feel the effects today. The U.S. Small Business Optimism Index was 91.3 in October 2022, down from 98.2 just a year earlier.
This index uses indicators like plans to create jobs, expectations for the economy to improve, current inventory levels, and trends in earning.
A survey from Small Business Majority in July 2022 found that almost one in three small businesses said they couldn’t survive longer than three months without getting more capital or seeing a change in business conditions.
It has been a challenge for many to operate as usual, or to operate at all, during the worst periods of the pandemic.
Many businesses depended on government aid created during the pandemic in 2020 and 2021. Among the most critical supports were the Paycheck Protection Program (PPP) loans and the employee retention credit (ERTC), both created initially by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed in March 2022. Both programs have now ended: the PPP on May 31, 2021, and the ERTC on September 30, 2021, for most businesses.
Qualifying businesses may still be able to claim the ERTC for past quarters, however, and existing borrowers can still get PPP loan forgiveness if they qualify. But how do you claim the ERTC now?
This guide walks through the reason the ERTC was created, who qualifies for it, how to claim the ERTC retroactively, and what businesses can do to get help moving forward.
What Was the Purpose of the Employee Retention Credit?
Like other COVID-19-era relief programs, the ERTC was created by the government via the CARES Act to help support businesses through economic uncertainty and pandemic shutdowns and losses. The ERTC is a fully refundable tax credit that is a portion of qualifying wages paid to employees, which was meant to help employees keep their workers on the payroll.
The ERTC was 50% of qualified wages in 2020, including qualified health plan expenses. Qualified wages must have been paid after March 12, 2020, through December 31, 2020, for that year. The max amount of wages employers can use for each employee is $10,000 for all calendar quarters, meaning the credit limit is $5,000 of wages paid to each employee for 2020.
The American Rescue Plan Act, signed into law in 2021, then extended the ERTC to December 31, 2021, but the program was later ended on September 30, 2021 – the exception being for recovery startup businesses. The ERTC increased to 70% of qualified wages and a limit of $10,000 per quarter in 2021, making the limit per employee for the whole year $21,000, or $7,000 per quarter.
The ERTC is not an income tax credit, and it isn’t related to your business’s profit and loss or your annual tax returns. The IRS usually issues the ERTC via cash payments, even though it is called a tax credit. Businesses must use the cash payments to cover their future payroll taxes.
Introduction to Employee Retention Credit (ERC)
Eligibility for Retroactive Employee Retention Credit
Calculating the Credit Amount
Claiming the Retroactive Employee Retention Credit
Benefits of Employee Retention Credit
Eligibility Requirements for the ERTC
You should determine whether your business qualifies for the ERTC, even though it has ended. You are still able to claim it for 2020 and 2021 if you are eligible. Here are the requirements to claim the ERTC:
Government Shutdowns
One way to qualify is to meet the requirement that your business had to suspend its operations, either partially or fully, in 2020 or 2021, due to a government order.
Gross Receipts Decline
You may still qualify even if you didn’t experience a shutdown. Your other option is to evaluate your gross receipts for a decline. Gross receipts for 2020 must have been 50% less in a quarter when compared with the same quarter in 2019, while for 2021, gross receipts must have been 20% less in a quarter than for the same quarter in 2019.
Business Start Date
ERTC qualifications stipulate that your business must have started operations before February 16, 2020.
Number of Employees
You do not qualify if you had no employees during the qualifying period. You must have had 100 or fewer full-time employees in 2020 to be eligible for the full credit, and 500 or fewer full-time employees in 2021. Businesses with employee counts over these thresholds can only claim the wages for workers not providing services (described in more detail below).
Recovery Startup Businesses
A recovery startup business is one that began operations after February 15, 2020, and brings in less than $1 million in total gross receipts. These businesses qualify to claim the ERTC through December 31, 2021.
PPP Loan Recipients
Another round of COVID-19-related legislation was the Consolidated Appropriations Act (CAA) of 2021. The CAA stated that businesses that received a PPP loan could also qualify for the ERTC, which was formerly not allowed.
Large Employers
You also need to know how “large employers” are defined, which differs for 2020 and 2021. Large employers were considered to have more than 100 employees in 2020, while for 2021, that number increased to more than 500 employees. Only wages paid by large employers to their employees for not working are considered qualified wages, so the updated definition for 2021 is important when determining if you qualify.
Many businesses are still eligible to claim the ERTC for 2020 and 2021. Meeting these eligibility requirements means you should proceed with filing Form 941-X right away to claim the credit. Talk to an ERTC expert when you’re unsure what to do next.
5 Steps to Apply for the ERTC Retroactively
It’s time to apply for the ERTC when you’ve determined you have qualifying quarters in 2020 or 2021. Many business owners mistakenly think that since the credit has ended, they can no longer claim it. You have three years from the date of your initial tax return filing to get the credit if you qualify. Here are some steps to take to get started:
1. Use Form 941-X
Find Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. This is an amendment to the original quarterly tax return you submitted for the applicable quarter. You will need to file a separate Form 941-X for each quarter for which you’re claiming the ERTC.
2. Add Up Your Qualified Wages
You can only use a percentage of wages paid to full-time employees in a qualifying quarter when you either had to close because of government shutdowns or saw significant losses in gross receipts. Remember that for 2020, the limit per employee per year is $5,000 and increases to $21,000 for 2021.
3. Calculate Your ERTC
Next, calculate the credit for your qualifying quarter or quarters. You may qualify for quarters two (starting March 13), three, and four in 2020, and in 2021, quarters one, two, and three. Recovery startup businesses can claim all four quarters in 2021.
4. Claim an Advanced Refund
Form 7200 allows you to claim an advance ERTC refund as long as you had 500 or fewer full-time employees and the amount you calculated for your ERTC is more than the total employment tax deposits you submitted for a pay period.
5. File Before It’s Too Late
You have three years from the date you filed the applicable tax return or two years from the date you paid the tax, whichever is later, to retroactively claim the employee retention credit – meaning you could potentially have until 2024 for 2020, or until 2025 for 2021, to submit the form to the IRS and receive the tax break.
You should claim the ERTC as soon as you determine your eligibility. You don’t have unlimited time to submit Form 941-X, and you want to get your tax credit soon to help your business stay strong in challenging economic times. Talk to an ERTC professional if you have questions about the ERTC or how to claim your tax credit.
What Businesses Can Do Moving Forward
Tax incentives like the ERTC and PPP may be over, but businesses can still take advantage of retroactive participation, loan forgiveness, and other forms of relief moving forward. Retroactively claiming the ERTC is an important first step. But here is a brief overview of steps you can take now that most COVID-19-related credits are gone:
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- File for PPP loan forgiveness: The PPP ended in May 2021, but if you are an existing borrower, you may still be eligible for PPP loan forgiveness. Both first- and second-draw PPP borrowers qualify for full forgiveness if they maintained employee and pay levels, spent at least 60% of the funds on payroll costs, and spent the rest on other eligible expenses during the 8 to 24 months after disbursement. You can apply for forgiveness up to the loan’s maturity date.
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- Look into the paid leave credit: COVID-19 legislation also included the paid leave credit for businesses with fewer than 500 employees. They had to provide paid sick and family leave to workers during the pandemic, and businesses were able to take a tax credit of 100% of this paid sick and family leave given to workers. This credit also ended on September 30, 2021.
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- Consider a Small Business Administration (SBA) loan: You will still be able to apply for an SBA loan, even though they aren’t offering forgivable loans now – for instance, the SBA still offers 7(a), 504, and micro-loans to businesses.
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- Research state relief programs: Many states have their own relief programs, like loans and grants, that continue to help small businesses deal with the effects of COVID-19. Look into local government programs or even grants from foundations near you to learn about new and ongoing opportunities.
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- Keep up with changing laws: Pay attention to changes to COVID-19 legislation and tax laws that impact small businesses. Each year, guidelines and requirements for tax breaks, loans, and other forms of relief change, and you never want to ignore an opportunity that could significantly impact your business.
The bottom line is to try to take advantage of every form of relief you’re eligible for. Filing to claim the credit is relatively simple when compared with the amount of support you could receive. Being unsure about eligibility requirements is expected, so talk to a tax or ERC expert today to learn more about the options available to your business.
Contact ERC Today with Questions
The ERTC is the most extensive government stimulus program ever. Most businesses qualify, so don’t delay filing Form 941-X to claim this significant credit. Don’t leave money on the table by thinking that the period to file has passed.
ERC Today is here to guide you through the process. We know all the latest laws and regulations that impact the ERTC and small businesses in general. We provide services to help you navigate uncertainty and answer any questions or concerns you have about the ERTC. We are 100% IRS compliant, require minimal upfront costs, and provide expert, focused services.
Contact ERC Today for more information about your Employee Retention Credit options.
