Understanding the Employee Retention Tax Credit
When the COVID-19 pandemic took hold, life and business as we knew it before came to a screeching halt. In response, the U.S. government introduced the Employee Retention Tax Credit (ERTC), also referred to as the Employee Retention Credit (ERC), to help employers retain staff and weather the economic storm. The ERTC is part of the Coronavirus Aid, Relief and Economic Security (CARES) Act, a $2.2 trillion economic stimulus bill signed into law in March of 2020.
Since its introduction, the ERTC has been extended as part of the Consolidated Appropriations Act of 2021 through the first two quarters of that year. In August 2021, it was extended for a third time through the American Rescue Plan of 2021 (ARP). Although this tax credit was sunset in fall of 2021, qualifying organizations can still file claims through the remainder of 2022.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit is a refundable payroll tax credit, designed to encourage employers whose companies were disrupted by COVID-19 restrictions to retain employees, and keep them on the payroll and collecting paychecks through the downturn in business.
This credit is equal to a percentage of qualified wages paid to employees by eligible employers, and can also include some health insurance costs
The percentages, which have varied since the inception of the ERTC, are as follows:
- From March 12, 2020 to before January 1, 2021, employers could claim a refundable tax credit against 50 percent of qualified wages paid, up to $10,000 per eligible employee annually
- The Consolidated Appropriations Act of 2021 extended the credit to wages paid after January 1, 2021, to before June 30, 2021, with some significant changes. Instead of up to $10,000 in wages per employee paid annually, this Act enabled qualified employers to claim a credit against 70 percent of qualified wages paid, with a credit of $10,000 per employee per quarter (for the first two quarters), as opposed to the previous amount of $10,000 per eligible employee annually
- New legislation states that, for the third and fourth quarters of 2021 (wages paid after June 30, 2021, to before Jan. 1, 2022), employers can claim a refundable tax credit of up to 70 percent of the qualified wages paid to employees with a maximum credit of $7,000 per employee per quarter
- The Act was sunset on September 30, 2021, but eligible businesses can still file claims through 2022
What businesses qualify for a tax credit?
The ERTC is available to nearly all private-sector employers that lost significant business or had to fully or partially suspend operations due to COVID-19 pandemic restrictions. Hospitals, colleges, universities, and 501(c) organizations are also eligible for the credits.
Although, when the CARES Act was first created, employers weren’t able to simultaneously obtain a Paycheck Protection Program (PPP) loan and claim the ERTC, all eligible employers can now obtain both a PPP loan and claim the ERTC.
Employers that received a PPP loan and would like to retroactively claim the ERTC for past quarters, can now file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the applicable quarter(s) in which the qualified wages were paid.
How does a business owner qualify for an ERTC?
To qualify for an ERTC, all employers, including tax-exempt organizations, must have operated a trade or business during calendar years 2020 or 2021 and, according to the IRS, experienced an interruption of operations during any of the listed periods because of limited commerce, travel, or group meetings due to COVID-19 and related governmental orders.
Employers can also qualify by calculating their gross receipts in each quarter, compared to past comparable quarters, in accordance with the specific requirements concerning compared gross receipts during these specific timeframes.
- If gross receipts in a quarter are below 50 percent of gross receipts of the same calendar quarter in 2019, an employer qualifies. If quarterly gross receipts exceeded 80 percent in the calendar quarter immediately following, compared to the same calendar quarter in 2019, that employer no longer qualifies.
- Under the Consolidation Appropriations Act of 2021, organizations impacted by forced closures and quarantines had to experience more than a 20 percent drop in gross receipts compared to the same quarter in 2019 to qualify
- The ARP Act of 2021 follows the same eligibility requirements as the Consolidated Appropriations Act, with one exception. Under this Act, organizations can gain eligibility by comparing gross receipts in the immediately preceding calendar quarter, not just the corresponding quarter in 2019
Which employee wages qualify for the ERTC?
Wages and compensation subject to FICA taxes and qualified health expenses will typically qualify for the ERTC. These expenses have to have been paid after March 12, 2020, and prior to January 1, 2022.
Qualifying health expenses can be calculated in multiple ways. In most circumstances, qualified health expenses only include the pre-tax portions paid by the employer or the employee. Typically, after-tax portions do not qualify.
Wage qualifications for the ERTC also vary depending on the size of the organization and the number of full-time employees who work 30 hours a week or 130 hours a month.
How do the credits work?
In 2020, the non-refundable piece of the ERTC was claimed against Social Security taxes. However, the ARP Act changed that, specifying that, for wages paid after June 30, 2021, the non-refundable pieces of the ERTC should be claimed against Medicare taxes, instead. This change will not impact the total credit amount.
If the credit received by the employer exceeds their total liability portion of Social Security or Medicare, the excess will be refunded to the employer.
How does a business file for a tax credit?
Employers can claim the ERTC when filing quarterly taxes using Form 941 Employer’s Quarterly Federal Tax Return for applicable periods. According to the IRS, if employers do not have sufficient funds to cover the credit, they can receive an advance payment by submitting the Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Can companies still file for tax credit in 2022?
When the Infrastructure Investment and Jobs Act was signed into law in November of 2021, it moved the sunset data for the ERTC to September 30, 2021. However, if they didn’t file before, eligible businesses can still apply for stimulus funds based on their financials dating from March 13, 2020 through September 30, 2021.