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Last Updated on December 23, 2023
As a business owner, navigating the landscape of taxes and credits can be daunting.
It’s crucial, however, to understand the available options and potential benefits. One such opportunity is the Employee Retention Tax Credit (ERTC).
This article aims to provide detailed insights into the ERTC and guide you through the process of applying for this credit.
How to Apply for the Employee Retention Tax Credit
To apply for the Employee Retention Tax Credit, you need to follow a process that involves understanding your eligibility, calculating your credit, and accurately reporting it to the IRS. Here are the detailed steps to guide you:
- Determine Eligibility: Review the eligibility criteria to ascertain if your business qualifies. Your business should have faced either a significant decline in gross receipts or a partial/full suspension of operations due to COVID-19-related governmental orders.
- Calculate Your Credit: The next step is to calculate the amount of the credit. This calculation includes the qualified wages paid to employees during the eligible quarters and is dependent on the size of your business and whether it received a Paycheck Protection Program (PPP) loan.
- Report on Quarterly Tax Returns: The ERTC is claimed by reporting your total qualified wages and related health insurance costs for each quarter on your employment tax returns. Generally, Form 941 is used for this purpose. This process reduces your required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
- Request Advance Payment (if necessary): If your employment tax deposits do not cover the credit, you can receive an advance payment from the IRS. This process involves submitting Form 7200.
It’s also crucial to remember that you can apply for the ERTC retrospectively, for eligible quarters in 2020 and 2021, by amending your employment tax returns.
The process of applying for the ERTC can be complex and may require assistance from tax professionals. Always ensure that your application aligns with the IRS guidelines to maximize your benefits while maintaining compliance.
What is the Employee Retention Tax Credit?
Introduced in response to the economic challenges of the COVID-19 pandemic, the Employee Retention Tax Credit (ERTC) is a provision of the U.S. federal government designed to encourage employers to maintain their workforce during periods of significant operational and financial difficulty. This measure aims to help sustain businesses, protect jobs, and ultimately stimulate economic recovery.
The ERTC is a refundable tax credit applied against certain employment taxes. Refundable tax credits are unique in that they can reduce a taxpayer’s liability below zero, meaning the taxpayer could receive a refund. In the context of the ERTC, if the amount of the credit exceeds a business’s total liability of the portion of social security tax for all employees for any calendar quarter, the excess is refunded to the business.
Originally introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the ERTC has seen several revisions and extensions, with each legislative update providing increased incentives for businesses to retain employees. These incentives come in the form of enhanced credit percentages, expanded eligibility, and the inclusion of larger businesses.
Under the original provisions of the CARES Act, the ERTC offered a credit of 50% of qualified wages paid by eligible employers, up to $10,000 per employee annually. Meaning, a maximum of $5,000 credit per employee could be claimed for 2020.
The Consolidated Appropriations Act, signed into law in December 2020, broadened the ERTC’s reach. The act increased the credit rate from 50% to 70% of qualified wages and expanded the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter. It also reduced the required year-over-year gross receipts decline from 50% to 20% and raised the limit on the number of employees counted when determining the relevant qualified wage base.
The American Rescue Plan Act (ARPA), signed in March 2021, extended the ERTC through December 31, 2021. Under this law, eligible employers could claim a refundable tax credit against the employer share of social security tax equal to 70% of the qualified wages they pay to employees, resulting in a maximum of $7,000 credit per employee per quarter and up to $28,000 per employee for the year 2021.
Understanding the ERTC’s benefits and eligibility requirements is crucial for businesses to take full advantage of the relief it offers during these challenging economic times. However, like all aspects of tax law, the ERTC is complex and ever-evolving. Businesses should seek advice from tax professionals or legal counsel to ensure they are appropriately applying the credit’s provisions.
Which Businesses Are Eligible?
To be eligible for the ERTC, a business must have experienced either a full or partial suspension of their operation during any calendar quarter because of governmental orders due to COVID-19, or a significant decline in gross receipts. A significant decline begins in the first calendar quarter in which an employer’s gross receipts for that quarter were less than 50% of its gross receipts for the same quarter in the prior year and ends in the calendar quarter following the first quarter in which gross receipts are more than 80% for the same quarter in the prior year.
Both for-profit businesses and tax-exempt organizations can qualify, but government entities generally cannot. Furthermore, the rules differ slightly depending on the size of the business.
How Much Money Can Your Business Get Back?
The ERTC initially allowed for a maximum of $5,000 per employee for the year 2020. For 2021, the Consolidated Appropriations Act greatly expanded the credit. For the first two quarters of 2021, businesses could receive up to $7,000 per employee per quarter – a potential $14,000 annually. And with the American Rescue Plan Act, the ERTC was extended, meaning eligible businesses could receive up to $28,000 per employee for the year.
The exact amount of the credit depends on several factors, including the size of the employer, the amount of wages paid to employees during eligible quarters, and whether the employer also received a Paycheck Protection Program (PPP) loan.
How to Apply for the Employee Retention Tax Credit
- Determine Eligibility: As detailed above, your business needs to have either experienced a significant decline in gross receipts or a partial or full suspension of operations due to COVID-19-related governmental orders.
- Calculate Your Credit: Once you’ve determined your business is eligible, the next step is to calculate the amount of the credit. Remember that the credit is applied to qualified wages paid to employees during eligible quarters.
- Report on Quarterly Tax Returns: To claim the ERTC, you’ll need to report your total qualified wages and the related health insurance costs for each quarter on your employment tax returns (typically, this would be Form 941) to reduce your required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit.
- Request Advance Payment (if necessary): If your employment tax deposits are not sufficient to cover the credit, you may receive an advance payment from the IRS by submitting Form 7200.
Is the ERTC Still open for Applications?
As of the time of writing in June 2023, the ERTC is still accepting applications. The program was last extended to cover qualified wages paid through December 31, 2021. Despite this, businesses that have not yet claimed the credit for eligible quarters in 2020 and 2021 may still do so by amending their employment tax returns.
It’s worth noting that changes can occur rapidly in response to ongoing economic conditions. As such, business owners should closely monitor news from the IRS and the U.S. government for potential additional extensions or new programs.
The Employee Retention Tax Credit provided a substantial financial resource for many businesses struggling with the impact of the COVID-19 pandemic. While the ERTC is currently closed for new applications, eligible businesses can still claim the credit for qualified wages paid during 2020 and 2021. By following the steps outlined in this guide, you can understand if your business is eligible for the ERTC, calculate the potential benefit, and navigate the process to apply for this significant tax credit.
Whether or not your business was able to benefit from the ERTC, it’s essential to stay informed about similar tax credits and incentives that may be available. Such programs can significantly reduce tax liability and help your business navigate financial challenges. As always, it’s recommended to consult with a tax professional to ensure your business is maximizing its tax benefits while remaining in compliance with IRS regulations.