In this article, we discuss:
Due to the Covid-19 pandemic, the U.S. federal government created the Employee Retention Tax Credit (ERTC). The purpose of the employee retention credit was to provide a refundable tax credit to help businesses with the cost of keeping staff employed during Covid-19 or to help businesses that experienced a large decline in revenue from March 13, 2020, to December 31, 2021. The ERTC was created from the CARES Act of March 2020 and has been subsequently modified three times as part of the Relief Act of 2021, the American Rescue Plan Act of 2021, and the Infrastructure Investment and Jobs Act (IIJA). This article explores where to get your ERTC filed to claim the internal revenue service (IRS) credit your business might still qualify for. However, there are a lot of qualifications to be aware of before you file.
Where to file your ERTC to Claim the IRS Credit
The IIJA ended the ERTC (also referred to as just ERC – Employee Retention Credit) and it is no longer an active government program. However, if your business didn’t originally claim the ERTC while the program was active, you can still file an adjusted quarterly federal tax return retroactively to wages paid from March 13, 2020, through Sept. 30, 2021. Specially designated Recovery Startup Businesses can file an adjusted quarterly Federal Tax Return retroactively to wages paid through Dec. 31, 2021.
To claim the ERTC for the prior 2020 and 2021 quarters, you must:
File deadlines to claim your ERTC
There are deadlines to file Form 941-X based on the date you initially filed your Form 941. Typically the IRS allows businesses to correct a previously-filed Form 941 if they file Form 941-X within 3 years of the date Form 941 was filed. This period is called the “period of limitations” and Form 941 is considered filed on April 15 of the succeeding year if filed before that date.
For example, if your business filed a 2019 fourth quarter Form 941 on Jan 9, 2020, and payments were timely made. The IRS views that return as if it were filed on April 15, 2020. Then you discover that you over-reported social security and Medicare wages on that form by $500 on March 5, 2023. To correct the error, you must file Form 941-X before the due date of April 18, 2023 (Tax Day 2023), which is the end of the period of limitations for Form 941 and the last chance to use the claim process.
Based on the IRS period of limitations for Form 941:
- For any Form 941 submitted before April 15th, 2020 you can submit Form 941-X before the due date of April 18, 2023
- For any Form 941 submitted before April 18th, 2021 you can submit Form 941-X before the due date of April 15, 2024
Helpful information to know before filing your ERTC
Before filing Form 941-X, here are some key things to know:
You have to file multiple Forms 941-X: Small businesses will need to use a separate Form 941-X for each Form 941 that they’re correcting. For example, if you have eligible wages that retroactively qualify for the ERTC on your Forms 941 for the third and fourth quarters of 2020, file one Form 941-X to correct the 2020 third quarter Form 941 and file a second Form 941-X to correct the 2020 fourth quarter Form 941. In other words, you will need an amended return for each Form 941 that you filed that has qualifying wages.
Percent of qualified wages eligible for credit:
- For calendar quarters in 2020, 50% of qualified wages ($10,000 per employee for the year including certain health care expenses)
- For calendar quarters in 2020, if your business had 100 or fewer average full-time employees (not part-time employees) in 2019, the wages paid to those employees providing services and also not providing services are considered qualified wages
- For calendar quarters in 2020, if your business had greater than 100 average full-time employees in 2019, the wages paid to those employees not providing services are considered qualified wages
- For the first three calendar quarters in 2021, 70% of qualified wages ($10,000 per employee per calendar quarter including certain health care expenses)
- For calendar quarters in 2021, if your business had 500 or fewer average full-time employees in 2019, the wages paid to those employees providing services and not providing services are considered qualified wages
- For calendar quarters in 2021, if your business had greater than 500 average full-time employees in 2019, the wages paid to those employees not providing services are considered qualified wages
For more information on the percent of qualified wages eligible for credit, visit the IRS’s information page titled Employee Retention Credit – 2020 vs 2021 Comparison Chart.
- For each employee in 2020, the maximum amount of the credit is $5,000
- For each employee in 2021, the maximum amount of the credit is $7,000
- “Recovery startup businesses” are limited to a $50,000 credit per calendar quarter
Employment tax offset:
- For calendar quarters in 2020, the business’s portion of Social Security tax
- For calendar quarters in 2021, changed to business’s portion of Medicare tax
Based on this information, pursuing an ERTC for your business if you had eligible wages during 2020 and 2021 makes a lot of sense. The ERTC can be a generous tax credit for a lot of businesses that can help with operations.
Let’s review ERTC eligibility:
Period for qualified wages paid: qualified wages paid after March 12, 2020, and before October 1, 2021. If your business is a recovery startup business, the employee retention credit for qualified wages paid is extended to include wages paid after September 30, 2021, and before January 1, 2022.
Eligible employer: For calendar quarters in 2020, eligible businesses must be operating a trade, business, or tax-exempt organization, but not governments, agencies, and instrumentalities. The Relief Act of 2021, for calendar quarters in 2021, expanded eligibility to include certain governmental employers that are organizations described in section 501(c)(1) of the internal revenue code and exempt from tax under section 501(a) of the internal revenue code, and colleges or universities whose principal purpose is to provide medical or hospital care.
- For calendar quarters in 2020, businesses must have had a full or partial suspension of operations due to a government order due to COVID-19 during any quarter or a significant decline in revenue (where revenue is less than 50% of the same quarter in 2019, but not eligible if the next calendar quarter their revenue exceed 80% compared to the same calendar quarter in 2019).
- For calendar quarters in 2021, amended decline in revenue to be defined as a quarter where gross receipts are less than 80% of the same quarter in 2019.
- For additional information on revenue requirements, visit the IRS Employee Retention Credit – 2020 vs 2021 Comparison Chart web page and scroll down to the Eligibility Requirements section.
Paycheck Protection Program: for any quarter in 2020 or 2021, a business cannot claim the ERTC on wages that were reported as payroll costs in obtaining PPP loan forgiveness or that were used to claim certain other tax credits. Since businesses have up to $10,000 in qualified wages per employee, you can still obtain an ERTC even if you previously took advantage of a PPP loan or PPP loan forgiveness.
Families First Coronavirus Response Act: The FFCRA is a law that requires certain businesses to provide their employees with paid sick leave, expanded family leave, and expanded medical leave for certain reasons related to COVID-19. The FFCRA was signed into law on March 18, 2020. However, qualifying wages for the ERTC do not include any wages taken into account for purposes of the credits under sections 7001 or 7003 of the FFCRA. Sections 7001 and 7003 describe the amounts of qualified sick leave wages and qualified family wages taken into account for purposes of the employer payroll tax credits for paid sick leave and paid family leave, respectively.
Self-employed: Earnings from self-employed individuals are not considered eligible for the ERTC. However, if a self-employed individual employs other people and those employees’ earnings meet the requirements listed above, those are qualified wages that are eligible for the ERTC.
How to receive advance payment on your ERTC credit
While the ERTC was still active, eligible businesses could have filed IRS Form 7200 to request an advance payment of their ERTC. However, the last day to file Form 7200, Advance Payment of Employer Credits Due to COVID-19, was January 31, 2022. Form 7200 remains on the IRS.gov website but it is now classified as a historical item.
Many businesses are experiencing long delays waiting for the IRS to process their Form 941-X. According to a report of the Treasury Inspector General For Tax Administration, there are “considerable delays in the processing of amended Forms 941 filed by businesses resulting in businesses not timely receiving the immediate financial relief for which this legislation was enacted. As of February 1, 2022, there were 447,435 Forms 941-X waiting to be processed. Over 90 percent (402,814) of these Forms 941-X were over-aged, i.e., have not been processed within 45 calendar days. In addition, 60,885 (13.6 percent) of the Forms 941-X were not processed within 180 calendar days.”
The Treasury Inspector General’s report highlights the long delays in waiting for the IRS to process Form 941-X and fulfill their promise of a refund to business taxpayers. However, businesses don’t have to wait for the IRS to process this massive backlog and eventually get to them. Businesses can turn to online lenders who offer ERTC loans and in some cases get funding as soon as 72 hours. An ERTC loan provides business owners with pending tax credits access to their funds while waiting on the IRS to process their request. Each lender will have different eligibility requirements for their ERTC loan products, but to give you a general sense of what you might encounter:
- Your business needs to be in operation since at least February 2020
- 660 credit score or above
- Pending IRS Credit of $100K or Greater
- Loan amounts from 65% of IRS credit
- Make interest-only payments for a certain period
ERTC loans can make a lot of sense when compared to other small business financing options. The window to take advantage of the ERTC will eventually close so now might be a good time to review your finances to see if you qualify.
Businesses who did not originally claim their ERTC, are still eligible to receive it on qualifying wages paid from March 13th, 2020 through Sept. 30, 2021 (Recovery Startup Businesses have through Dec. 31, 2021). Businesses will have to file an amended tax return via Form 941-X and file before the period of limitations (within 3 years of the date Form 941 was filed). The ERTC credit can be lucrative for certain businesses and it is worth pursuing.