Are you missing out on $33,000 per employee?
The IRS has extended their Employee Retention Tax Credit (ERTC) for employers that kept employees on payroll throughout the COVID pandemic. Eligible employers can claim a refundable tax credit of up to $7,000 in qualified quarterly wages per employee in 2021 and up to $5,000 per employee in 2020. Small Businesses (i.e., employers with an average of 500 or fewer full-time employees in 2019) can even request advance payment of the credits.
The ERTC was first established as part of the CARES Act in March 2020. It was expanded in the December Relief Package and again in March as part of the American Rescue Plan.
More than 30,000 small businesses have claimed more than $1 Billion dollars this year according to the White House.
Who is eligible for the credits
Most employers, including 501(c) organizations, colleges, hospitals and even Tribal Organizations can qualify for the credit. Employers of all sizes are eligible for the credit but there are different rules for companies averaging over 500 employees. To be eligible you must be an employer that actively carried on a trade or business during the year 2020 or 2021.
Those entities that are not eligible are Federal, State, or Local Governments or agencies of those entities. Self-employed individuals are not eligible in respect to their own employment but are in respect to those people that they employ. Household employers are also not eligible under the current rules of the ERTC.
2020 ERTC Employer Eligibility
- Experience a full or partial shutdown of operations during any calendar quarter of 2020. This could be because of a government order, travel, group meetings (for social, commercial, religious or other purposes) or due to the pandemic.
- Had more than a 50% decline in gross receipts from the previous quarter in 2019.
2021 ERTC Employer Eligibility
- Experience a full or partial shutdown of operations during any calendar quarter of 2020. This could be because of a government order, travel, group meetings (for social, commercial, religious or other purposes) or due to the pandemic.
- Had more than a 20% decline in gross receipts from the previous quarter in 2020.
Just because you didn’t qualify for the 2020 credits doesn’t mean you don’t qualify for the 2021 credits.
Under this law, certain startup businesses may be allowed a credit of up to $50,000 per quarter if they don’t meet eligibility for the full credits. If you gross receipts are under $1 million you may qualify as a Recovery Startup Business. the IRS allows the use of gross receipts from the first quarter in which you started business.
How do the credits work
For 2020 you can claim a tax credit of 50% of up to $10,000 in qualified wages paid per employee for 2020 between the dates March 13, 2020, and December 31, 2020. Businesses can claim 70% of up to $10,000 in qualified wages paid per employee per quarter. That is a total of $33,000 of credits that an employer can claim per employee.
Eligible employers can reduce their employment taxes by the amount of their qualifying credits. Businesses that average 500 or fewer employers can even request an advance on their credits from the IRS if the amount of the credit is more than they owe in employment taxes. More on that in a minute.
You can claim your credits immediately by reducing the payroll taxes that you send to the IRS. If your credits exceed your payroll taxes, then you can request an advance from the IRS.
The ERTC can be claimed through December 31, 2021 to eligible employers.
Does a PPP loan disqualify me from the credits
If you received a PPP loan you were originally disqualified from receiving the ERTC. The new law now allows businesses that have received round one and even round two PPP loans to qualify for the ERTC.
How do I claim my credits
Eligible employers will need to report their total qualified wages, sick leave and qualified family leave on form 941. You can hold back from depositing the total amount of your federal employee taxes owed by the amount that you are due to receive form the ERTC.
You will account for those funds withheld from deposit when you file form 941, the Employer’s Quarterly Federal Tax Return for the quarter. According to the IRS, you will not incure a penalty for reducing your deposit by the credits you are due under the ERTC.
You may also choose to defer the employer’s portion of Social Security taxes before reducing any deposits made.
How can I get an advance on the credits
Employers can request an advance on the credits for the amount of the credit that is not funded by reducing the Federal Tax Deposits by filing form 7200.
This information has intended to be informative and is not intended to be a legal authority. The IRS has not updated its FAQs as of the writing of this article so some parts of the program may change or be expanded. Due to the complexity of the program, I advise that you work with your tax professional, accountant, or payroll company.
It is also possible to claim the 2020 credit even if you have already filed your returns. Talk to your tax professional about amending your 2020 returns to take advantage of the ERTC. If you do not have someone to talk to or they do not know about the ERTC you can look for one here.
