Getting Financial Relief: What Is ERTC?
According to some research, 20% of small businesses will fail within the first year of being open. This is due to many reasons, one of them being a lack of funding or problems with the budget.
However, companies can help prevent this by taking advantage of the employee retention credit.
There is a lot of information online about the ERTC, but what is ERTC? And what should you know about it?
Keep reading to learn all about how it can benefit your business.
What Is ERTC?
The ERTC is a refundable credit that a business can claim. You can use it for qualified wages for your employees, including health insurance costs that you’ll pay for employees.
The ERTC is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees.
The ERTC has evolved under different acts over the past two years. For example, in 2020, the CARES Act said that employers who qualified could claim a credit against 50% of their qualifying wages.
This was up to $10,000 for each employee annually for any wages that the employer paid between March 13th and December 31st, 2020.
In addition to that, there was the Consolidated Appropriations Act for 2021. If employers qualified, they could claim a credit for 70% of the wages that you paid. In addition, the amount of wages eligible was $10,000 for each employee per quarter. This was for quarters one and two in 2021.
The American Rescue Plan Act 2021 covered the last two quarters of 2021. The credit still covered 70% of eligible wages. With this, an employer could claim up to $7,000 per employee for each quarter. With that, the employer could claim up to $21,000 for all of 2021.
How Has ERTC Changed?
Since COVID-19, there have been some big changes to this ERC credit. For example, in March 2020, the CARES Act brought different changes to provide relief to restaurants.
This credit also changed to allow employers with less than one hundred employees to get up to $5,000 for each employee based on qualifying benefits and wages. To be eligible, they had to lose 50% of their gross receipts or have a capacity restriction due to the government.
But despite all of that, many restaurants still did not apply for the credit in 2020. That’s because if a business took a PPP forgivable loan, they could not also take the ERTC.
However, in December 2020, the restrictions on this were reduced. They were reduced because small businesses still needed more help in the midst of the COVID-19 pandemic. Congress let businesses get the ERTC even if they had a PPP loan.
In addition to that, Congress also increased and expanded the program to help businesses. In 2021, if businesses had fewer than 500 employees, they could access the employee’s benefits and wages. The company could also get up to $7,000 per employee’s benefits and wages.
If businesses wanted to be eligible, they have to show that they lost more than 20% of their gross profits in a quarter. The company also could be eligible because of a government restriction on capacity.
ERTC eligibility was also extended until the end of 2021. However, the eligibility was later changed in the fourth quarter.
How Does It Work?
This credit is a refundable tax credit for businesses. It allows businesses to subtract up to $26,000 for each employee from their taxes. In 2020, the maximum was $21,000 per employee, and in 2021, it was $5,000 per employee.
This is a tax credit that only a business can claim. Individual employees cannot claim this on their own. It will only apply to employees who are on a business’s payroll, not a freelancer or contractors.
In general, a tax deduction will reduce the amount of a business’s taxable income. Instead, the ERTC tax will subtract the amount of taxes that a business can owe, so companies can really take advantage of this credit.
The ERTC is refundable, which means that any qualifying business can get the entire amount of the credit. They will not have to worry about their tax liabilities or any other income that they have.
Who Is Eligible?
While other tax credits might be broader, the CARES Act limited the ERTC to certain employers. It was mostly focused on businesses that were affected by the COVID-19 pandemic.
This included most businesses, except for employers in government or self-employed people. There were two main things you needed to qualify for the ERTC.
This included having your operations fully or partially suspended because of the COVID-19 pandemic and government rules that affected your business. For example, if a restaurant could only operate at 50% capacity, that business would be eligible.
In addition, they needed to show that they had a decline in their gross profits during a quarter in 2020. The profits had to be 50% less than the similar quarter that they had in 2019. So, for example, if a business made $10,000 in profit in quarter two of 2019, but only made $5,000 in quarter two of 2020, it would be eligible for the tax credit.
If the business was eligible, then it would depend on how many employees were on the payroll. If a business had less than 100 employees, all of the employees would be eligible for the business to use that tax credit.
However, if a company had more than 100 employees, the only eligible ones were those who were paid but were not providing any service because of COVID-19 restrictions were eligible.
Even if you are exempt from taxes, you can still claim this credit.
In addition to those stipulations, any business that was also receiving the Paycheck Protection Program (PPP) was not eligible for the ERTC. Because of that, employers could not double-claim employees for the Family and Medical Leave Act or the Work Opportunity Tax Credit.
Exceptions for Startups
If you’re a startup, you may also be eligible. However, you’ll need to qualify as a business recovery startup business. If you found your business after February 15, 2020, then the IRS considers you a recovery startup business.
You’ll also need to show your gross receipts that are under an average of $1 million dollars. You’ll also have to have a $50,000 total credit for each calendar quarter.
Keep in mind that if you had wages extended through the end of December 2021, you’re considered a recovery startup business. If you did not claim ERTC credits then because you were not aware of this, you may be able to retroactively claim this credit.
How Does It Affect Tax Return?
The IRS will reduce the business’s tax for the year that they filed for the credit. For example, if a business used this credit on wages in 2020, then they would have it in their 2020 text so far.
In 2021, you’ll have a 2021 tax credit even if you have not received your refund yet. Keep in mind that if you try to claim the ERC tax in 2021 for quarters in 2020, then you’ll have to revise your business income tax return.
You may also need to get an organizational adaptation request. This will be filed and display the reduction in wage. Keep in mind that this credit won’t appear on your tax credit until the next year.
How Much to Claim
The amount to claim will be different for each business, depending on their COVID-19 factors and the number of employees. While it would be easier for companies to have claimed this credit sometime between March 2020 and December 2021, you can retroactively claim this credit as well.
However, keep in mind that it will only cover 50% of the wages for each employee. You’ll have a credit of $5,000 for each employee that you kept, but it will also depend on how much you pay that employee.
How to Maximize ERTC
For businesses that do want to claim this credit, there are different ways to maximize it. If companies are not able to claim the ERTC because of a PPP loan, now, you can also claim the ERTC even if you have a forgiven PPP loan.
However, there are guidelines from the IRS for nonprofits and other employers to ensure that they’re using the qualified expenses. For example, a PPP loan can cover non-payroll expenses, and you can use the ERTC credits for other payroll expenses.
How to Calculate ERTC
If you’re claiming for 2020, you’ll have to calculate the credit at a rate of 50% of the qualified wages. If you’re an eligible business, you can claim up to $10,000 for each employee in wages or healthcare coverage for the whole year of 2020.
There was a maximum credit of $5,000 for each employee for each year. If you had less than one hundred full-time employees in 2019, the funding is available for all of your employees in the 2020 fiscal year.
If you’re claiming the ERTC for 2021, then you can claim that credit, but it will be a little bit different than 2020. You’ll calculate this credit at a rate of 70% of the qualified wages that you paid to employees. You can also claim up to $10,000 for each employee.
There is also a maximum credit of $7,000 for each employee for each quarter. One of the main differences is that you could claim $21,000 per employee for the first three quarters in 2021. If you have less than five hundred employees in 2019, you can use that tax credit for 2021.
How to Claim It Retroactively
Now that you know about the ERTC requirements and all of the information, you’ll want to be able to retroactively claim it in 2022. In March 2021, the IRS sent out a notice 2021-20. This provided guidance for employers on how to claim ERC.
However, it only gave guidance for credits that were applied to wages between 2020 and September 2021. However, the notice does give guidance for employers who received a PPP loan. They say that if you had the PPP loan, you can retroactively claim this credit.
But if you want to claim this credit, the business will need to fill out Form 941-X. This form is the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. You’ll want to fill this form out for each quarter that you’re claiming the credit for. If you need an example for this form, the IRS also provides samples to follow.
If you’re still not sure if your business qualifies for retroactive credit, the IRS gives many examples and scenarios that you can use to determine if you should apply. Keep in mind that the wages eligible will depend on the qualified wages that you had through the PPP loan forgiveness.
Keep in mind that the IRS says that if expenses are eligible for PPP forgiveness, you cannot factor this into the credit. It’s important to make sure that all of your eligible expenses are included on the PPP loan forgiveness application to maximize the amount of qualified salaries that you can use for the ERTC credit.
How to Submit Claim
If you qualify for this claim, you’ll then need to submit one. The ERTC is not a write-off. Instead, it’ll help reduce a portion of your tax. Businesses have two options.
They can either claim the ERC on Form 941 and receive a refund on taxes paid in the past. Or, they can file to reduce employment tax deposits based on the number they expect back from the ERTC.
Keep in mind that if your credit is more than your payroll taxes, you can request an advance payment. However, to do this, you’ll need to file Form 7200 with the IRS.
Discover More About ERTC
These are only a few answers to the frequently asked question: “What is ERTC?” We know that running a business and keeping track of all these things can be stressful, but we’re here to help you out.
If you’re still unsure of how to complete this claim, we can help walk you through the process.
Check out our website to find more information about how can help you with ERTC filing.