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What is ERTC and who is eligible?
The Employee Retention Tax Credit (ERTC) was created as a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020, by President Donald Trump. The purpose of the ERTC is to provide a refundable tax credit for wages paid during the economic slowdown caused by the pandemic, encouraging small business owners to keep employees on the payroll even during periods of decreased revenues. The ERTC was amended by the ensuing laws:
How much is the ERTC?
While the availability of the ERTC, or Employee Retention Credit (ERC), has ended, entrepreneurs may still be eligible to retroactively claim the credit or apply for an advance payment of earned credits. The credits issued through the ERTC were intended to compensate companies that lost revenue during 2020 and 2021 because of the COVID-19 pandemic but continued paying salaries and wages to employees. Qualifying businesses are eligible for a $5,000 payroll tax credit for each employee paid during 2020 and up to $7,000 per quarter per employee paid through September 30, 2021.
Who is eligible for the ERTC?
Private companies, both for-profit and tax-exempt nonprofit organizations, are eligible for claiming retention tax credits. To claim the ERTC credit, those businesses must meet at least one of these criteria:
- For the 2020 credit: The gross receipts for any single quarter in 2020 decreased by at least 50% from the same quarter during 2019. (Reduced Gross Receipts test)
- For the 2021 credit: The gross receipts in a single quarter of 2021 were at least 20% lower than the same quarter in 20219. (Reduced Gross Receipts test)
- The business was ordered by a local government or federal government ordinance to fully or partially shut down during 2020 or 2021. (Government order test)
The calculations for the credits are based on a comparison of revenues to pre-pandemic data, but for small businesses that were not yet operating in 2019, the application process allows using a corresponding 2020 quarter.
What employee wages are eligible?
For small businesses with fewer than 100 full-time employees, all employee wages are eligible. Businesses that regularly employ more than 100 employees are only able to claim the credit for full-time staff members that are receiving pay but not providing any services to the business for the reasons of a shutdown or gross receipt reduction. Employers are not allowed to claim the ERTC and the Work Opportunity Tax Credit or credits for the Family and Medical Leave Act (FMLA) for the same employee for any quarter.
For small businesses, eligible wages include all wages, salaries, employment tax, Medicare taxes, and health insurance benefits paid to the employee. For large businesses, eligible wages and employer share health insurance benefits only apply if they are being paid to an employee that is not providing their regular scope of services.
- 2020 income – Wages paid from an employer that met qualification requirements between March 13, 2020, and December 31, 2020.
- 2021 income tax return – Wages paid from an employer that met qualification requirements between January 1, 2021, and September 30, 2021.
ERTC and PPP loans
The Paycheck Protection Program (PPP) is a forgivable loan program that came from the CARES Act and was modified by the Consolidated Appropriations Act of 2021 (CAA). PPP is backed by the U.S. Small Business Administration (SBA) and the U.S. Treasury and initially forced small business owners to choose to participate in the PPP or the ERTC. However, because of the amendments in the CAA, employers with PPP loans are also eligible for Employee Retention Tax Credits.
How to file ERTC
The Employee Retention Tax Credits are applied against the employer’s share of Social Security taxes for the quarter. Employers whose tax deposits are not sufficient to cover the credit may be eligible for an advance payment from the IRS. The ERTC program is no longer active, as specified in the Infrastructure Investment and Jobs Act (IIJA), but small businesses that have not yet claimed ERTCs can file an adjusted quarterly federal tax return for wages paid between March 13, 2020, and Sept 30, 2021, by following these steps:
Once you’ve reviewed the eligibility requirements as stated in the Government Order Test and the Reduced Gross Receipts Test, you can prepare to apply for the tax credits. The first step is to gather the following documents:
- Eligible employer details – Business name, organizational structure documents, legal address, number of employees
- Payroll data – Compile payroll records for the dates between March 13, 2020, and Sept. 30, 2021, or through December 31, 2021, for Recovery Startup Businesses, including employer-paid healthcare benefits and all other qualified wages.
- PPP loan documents – If you received a PPP loan, be prepared to share the date the loan was granted and the total loan amount. These documents are required, but they are also useful to calculate eligible credit amounts.
- Income reports – Compile sales and revenue data for 2019, 2020, and 2021. This information can be provided on sales reports, income statements, or other completed financial statements.
Check the deadlines and File Form 941-X
The deadlines for amending previous quarterly wage reports are based on the original dates your tax Form 941 was filed. The IRS permits businesses to amend Form 941 by completing IRS Form 941-X (Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund) within three years of the original filing date. The original filing date for Form 941 is considered April 15th of the succeeding year if it was filed before that date. The IRS periods of limitations for filing Form 941-X are:
- April 18, 2023 – for any Form 941 submitted before April 15th, 2020
- April 15, 2024 – for any Form 941 submitted before April 18th, 2021
As long as you are still in the period of limitation you can claim the ERC credit for 2020 and 2021 quarters by following this step-by-step guide:
- Complete Form 941-X
- Send the form to the address listed on the IRS page: where to file Form 941-X
- Notify your certified public accountant (CPA) or business tax professional and provide copies of any amended returns
How to get an advance payment of ERTC
To apply for an advance payment of an ERTC before January 31, 2022, employers could file Form 7200. However, now that the ERTC program is no longer active, the IRS is no longer accepting those forms. For businesses that have filed Form 941-X and are waiting for the return to be processed, they may be eligible to apply for an ERTC loan through an online lender, like Biz2Credit. ERTC loans are fast funding and most businesses receive funding in their business bank account in as little as 3 business days. Typically to meet the eligibility requirements of a lender, you will need:
- A business that has been in operation since at least February 2020
- A pending IRS credit of $100,000 or more
- A credit score at or above 660
While the Employee Retention Tax Credits were created to help small businesses, figuring out how all of the information applies to you can be challenging. If you have questions about your ERTC eligibility or status, we recommend reaching out to your business tax preparer. If your questions are regarding ERTC advance payments or loans, contact a financing expert at Biz2Credit. We’ve also put together the following answers to some commonly asked questions.
Do employee tips count towards wages paid?
If your employees earn tips that are subject to FICA taxes and are over twenty dollars per month, then those tips can be counted in this credit.
Can I use my qualified wage amounts to apply for PPP loan forgiveness?
No. Wages used to claim ERCs can’t be used as payroll costs when calculating the amount of PPP loan forgiveness. The wages are categorized in the nonrefundable portion of PPP payroll data.
What are qualified health plan expenses?
The IRS defines qualified health plan expenses as “amounts paid or incurred by the Eligible Employer to provide and maintain a group health plan.” Employer contributions to Health Savings Accounts (HSA) do not count as qualified wages, but contributions to a health reimbursement arrangement (HRS) or Flexible Spending Account (FSA) can be included. Sick leave wages and family leave wages are increased by these health plan expenses.
How are the employer credits calculated?
The refundable credit can be claimed on up to 70% of qualified wages paid to employees. So for small businesses with fewer than 500 employees, all wages qualify. For companies with more than 500 employees, qualified wages are those that were not provided services during a partial suspension or disruption of business. The maximum ERTC is 70 % of $10,000 per quarter.
Should I include 1099 wages in my ERTC claim?
No. Payments to independent contractors and freelancers do not count as qualified wages. Use the payroll figures from W2 employees only to calculate your total credit.
What is a Recovery Startup Business?
Recovery startup businesses are companies started after February 15, 2020, that have annual gross receipts under one million dollars. Recovery startup businesses can claim the ERTC through the end of 2021 and are not required to meet the significant decline or government order criteria. Eligible startups can claim up to $50,000 for each qualifying quarter up to $100,000 annually. Each quarter’s tax credit can equal 70% of eligible employee wages for a maximum credit up to $10,000 per employee, per calendar quarter.
Are sole proprietors or self-employed individuals eligible for the ERTC?
No. Sole proprietorships and government agencies are not eligible for the ERTC. Self-employed individuals may qualify for ERTC only if they have paid wages to other staff members.
My ERTC is not enough help, are there other loan programs to help me recover financially?
Yes. ERTCs and ERTC loans are useful only for qualifying businesses. If you did not receive the tax credits or did receive them and are still experiencing financial hardships at your business, consider talking with a business lending expert about these other loan programs:
The Employee Retention Tax Credits were created as an incentive for small businesses to continue to provide an income to their workers throughout the pandemic. Many entrepreneurs were helped by these credits and some, like Mike Gavigan, even benefited from taking out an ERTC loan on their pending credits. The ERTC program has ended, but it’s not too late to retroactively claim the tax credits or apply for an ERTC loan. Reach out to Biz2Credit today to get started.