Small Business Owner’s Guide to Employee Retention Tax Credits
Originally created within the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Employee Retention Tax Credit (ERTC) is an incentive designed to encourage employers to keep employees on their payroll as businesses face the lingering economic impacts of the COVID-19 pandemic.
At first, these credits were created to help small businesses retain employees who were not able to work during the mandated COVID-19 shutdowns. Once states and localities began to reopen and businesses looked to bounce back, Congress extended many pandemic relief programs including ERTCs through the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA).
The Employee Retention Tax Credits have the potential to be the second largest source of financial relief for businesses during COVID-19. More employers can now qualify for ERTCs than when they were first introduced. In this article, we’ll focus on the basics of employee retention tax credits (ERTCs)—including what they are, who qualifies, when they’re available, how they can be claimed, and how much they can be worth.
What is the Employee Retention Tax Credit (ERTC)?
The Employee Retention Tax Credit (ERTC) provides tax relief for companies that lost revenue in 2020 and 2021 due to the COVID-19 pandemic. Eligible businesses can get a refundable payroll tax credit equal to a percentage of eligible wages per employee. In 2020, the credit was worth 50% of the first $10,000 of wages and healthcare benefits paid to each employee. In 2021, employers can claim 70% of the first $10,000 is qualified wages for each employee in every quarter.
How much are Employee Retention 2021 credits worth?
In 2021, businesses can claim 70% of the first $10,000 in qualified wages for each employee in every quarter. Therefore, an employer is allowed a maximum of $7,000 in every quarter, or up to $28,000 per employee during 2021 which can add up to significant funds. For example, if you have 10 employees: (10 employees) * ($5k + $28k) = $330,000. If you have 50 employees: (50 employees) * ($5k + $28k) = $1.65 million.
Which businesses qualify for the Employee Retention Credit?
To be eligible for the ERTC, an employer must actively carry on a trade or business during the calendar year 2020 or 2021. Employers must also pass one of the following tests:
Government Order Test: A business must experience a calendar quarter “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19.”
Reduced Gross Receipts Test: An employer experiences a significant decline in gross receipts—which includes all receipts received including PPP loan forgiveness. In 2020, the decline is defined as at least 50 percent in any calendar quarter when compared to the same quarter in 2019. In 2021, the decline is defined as at least 20 percent in any calendar quarter when compared to the same quarter in 2019.
There is also a size element to ERTC qualification as there are different definitions for eligible wages based on the size of the employer and the number of average full-time employees (FTEs). In order to qualify for 2020 credits, an eligible employer is considered small if they have 100 or fewer average FTEs. To qualify for 2021 credits, an eligible employer is considered small if they have 500 or fewer average FTEs.
What if my business received a PPP loan?
In 2020, under the CARES Act, if a business had applied for and received a PPP loan, it could not also receive ERTC. However, the CAA and ARPA now allow businesses to take advantage of both programs—as long as you avoid “double-dipping”. You cannot claim ERTC for employee wages that you paid using funds from a PPP loan.
When are the credits available? What if my business already filed its 2020 tax return?
The ERTC is available to businesses in two tax years: 2020 and 2021. The CARES Act stipulated that wages paid after March 12, 2020 through December 31, 2020 are eligible for the credit. If your business has already filed a tax return for 2020, you might still have the opportunity to claim this credit if you are willing file amended returns. If you are, be sure to discuss your options with a tax advisor to ensure your business remains compliant with industry and tax law.
If you believe your business does qualify, it could provide some much-needed relief. For example, Asure helped one restaurant in Galveston, Texas file amended returns in 2020 to get back $552,000.
The CAA and ARPA extended the ERTC to tax year 2021, so wages paid from January 1, 2021 through December 31, 2021 are eligible for an expanded credit. For tax year 2021, it is also important to partner with a tax advisor to ensure you get much-needed relief and remain compliant.
How can my business claim the ERTC?
The ERTC is a payroll tax credit which is reported on Form 941. It is different from an income tax credit. If you’re eligible, employers can reduce employment tax deposits with the IRS. Advance payments are also available to small employers by using Form 7200 Advance Payment of Employer Credits Due to COVID-19 with some limitations.
Need help with your Employee Retention Credit?
Small businesses should be thinking about how to take advantage of these pandemic relief programs before they run out. Do you think your business is an eligible employer? Do you know how to claim the ERTC?
These are questions Simpay Payroll experts can help you answer. And, if your company is eligible, we will assist you with reviewing qualified wages, calculating the credits, and filing amended payroll tax returns that allow you to claim your ERTC credits with the IRS.