The Employee Retention Tax Credit (ERTC), part of the CARES Act, was designed to provide financial relief to businesses that kept employees on payroll during the economic challenges caused by the COVID-19 pandemic. This tax credit has helped countless businesses retain their workforce by offsetting payroll tax liabilities, offering a substantial incentive for companies to maintain their employment levels.
The eligible employers who paid wages to some or all employees after March 12, 2020, and before January 1, 2022 can avail this credit.
Here’s everything you need to know about the ERTC, including eligibility, benefits, and how to apply.
What is the Employee Retention Tax Credit?
The ERTC is a refundable payroll tax credit that was introduced as part of the CARES Act in 2020 to assist employers facing financial hardship due to COVID-19. It aimed to encourage employers to retain employees, even if business revenue had significantly declined. The ERTC covers a percentage of employee wages, which can be claimed as a credit against the employer’s share of Social Security payroll taxes. The credit has been expanded and adjusted in different legislative updates, enhancing its benefits and extending eligibility.
Eligibility for the ERTC
Eligibility for the ERTC depends on several criteria:
- Operational Impact: Businesses must show that they either faced a full or partial suspension of operations due to government orders or experienced a significant decline in gross receipts.
- Significant Revenue Decline: The definition of “significant decline” has changed over time:
- In 2020, businesses needed to show a decline of at least 50% in gross receipts compared to the same quarter in 2019.
- In 2021, this threshold was lowered to a 20% decline, making it easier for more businesses to qualify.
- Size of the Business: The size of the business also affects eligibility.
- For 2020, businesses with 100 or fewer employees could claim the credit on all employee wages, while those with over 100 employees could claim it only for wages paid to employees who were not working.
- For 2021, this limit was raised to 500 employees, allowing larger companies to take advantage of the ERTC more fully.
- PPP Loan Recipients: Initially, businesses receiving Paycheck Protection Program (PPP) loans could not qualify for the ERTC. However, the Consolidated Appropriations Act (CAA) passed in December 2020 made it possible for businesses to claim both, although they cannot claim the ERTC on wages covered by PPP funds.
For insights on payroll management and tax compliance, explore Payroll and Accounting Webinars, which cover essential topics, including updates on tax credits and efficient payroll management strategies.
How Much Can Businesses Claim?
The amount of the ERTC varies based on when the credit is claimed:
- For 2020: The credit was equal to 50% of qualified wages, up to $10,000 per employee for the entire year. This means employers could receive a maximum credit of $5,000 per employee for 2020.
- For 2021: The benefits were increased to 70% of qualified wages, up to $10,000 per employee per quarter (not annually). This change meant businesses could receive a maximum of $7,000 per employee per quarter, or $28,000 per employee for the year.
Things that an employer needs to know about payroll deductions 2020.
Calculating Qualified Wages
“Qualified wages” can differ depending on the business size. For smaller employers (under the specified threshold), qualified wages include all wages paid to employees. For larger employers, only wages paid to employees who were not working due to operational disruptions qualify. Qualified wages also include health plan expenses, allowing businesses to cover a significant portion of both salary and healthcare costs for their employees.
Applying for the ERTC
To claim the ERTC, businesses must report the total qualified wages and health insurance costs on their quarterly employment tax returns, typically on Form 941. For eligible wages in past quarters, businesses can retroactively claim the ERTC by amending previous tax returns, often using Form 941-X. Some businesses also utilized an advance payment form to receive credit sooner rather than waiting for a refund on payroll taxes.
Benefits of the ERTC
The ERTC offers several benefits to employers:
- Cost Savings: The ERTC provides significant savings by reducing payroll taxes, making it easier for businesses to retain staff and continue operating during challenging times.
- Liquidity Boost: By covering a substantial portion of payroll costs, the credit frees up cash flow, allowing businesses to allocate funds to other critical expenses.
- Increased Retention: The ERTC incentivizes employers to maintain staffing levels, which can improve workforce morale and reduce turnover costs.
Know more about types of fringe benefits such as health and unemployment insurance, which can be relevant as employers consider benefits that support employee retention
Recent Changes and the Future of the ERTC
The ERTC has gone through numerous modifications to make it more accessible and beneficial. The American Rescue Plan Act (ARPA) extended the ERTC through December 31, 2021, for most businesses. However, certain updates restricted the credit after September 2021 for most companies, except for “recovery startup businesses.”
Businesses are encouraged to take advantage of any remaining ERTC benefits before they fully expire. Even if the program doesn’t continue, employers can still file retroactive claims for 2020 and 2021, as long as they meet eligibility criteria and file amendments within the designated timeframe.
Conclusion
The Employee Retention Tax Credit has been a critical tool for businesses navigating the financial challenges of the pandemic. By covering a portion of payroll costs, the ERTC allows employers to retain valuable staff, alleviate tax burdens, and promote workforce stability. Understanding the credit’s eligibility requirements, calculation methods, and application process is essential for businesses to take full advantage of its benefits. For businesses that haven’t yet claimed it, now is the time to review eligibility and consider amending prior returns to secure this valuable support.
