The Employee Retention Credit Explained by a CPA

Certain employers who meet the criteria can file again this year for an Employee Retention Credit (ERC), also referred to as Employee Retention Tax Credit (ERTC). As a small business owner, the ERC can be extremely beneficial to you local business. So, if you want to apply for the employee retention credit, there are key deadlines that you should take note of so you can apply on time. Since the process of claiming the credit can be more complex than it seems, you may consider working with a professional tax accountant who can guide you through the process.

In this blog post, our CPA team at Steward Ingram & Cooper, PLLC will provide up-to-date information on the employee retention credit to help you understand your eligibility, inform you of deadlines, and guide you through the filing guidelines. Let’s get stated.

History of the Employee Retention Credit

The Employee Retention Credit was created by the Coronavirus Aid, Relief and Economic Security Act (CARES) that was made into law in March 2020 similar to the Paycheck Protection Program (PPP). The ERC is a pandemic-era tax credit for employers that kept paying employees during the COVID-19 pandemic.

Here are some details about the Employee Retention Credit:

• Small to medium-sized businesses can claim up to 50% of qualifying wages paid between March 13, 2020 and December 31, 2020.
• Eligible employers can claim up to $10,000 per employee.
• The Consolidated Appropriations Act (CAA) increases the refundable tax credit to 70% for wages paid up until the end of 2021, with a maximum of $10,000 per employee.

How the Employee Retention Credit Works

The ERC is a payroll tax credit, meaning eligible employers can receive refunds for paid taxes. Even if your business may have paid little to no income taxes, you could still receive a tax credit for your federal employment taxes. This payroll tax credit, based on the amount of qualified wages paid, could provide the relief you need as a small business and help keep your valuable employees on the payroll.

Filing Deadlines for the ERC in 2023

Even though the tax credit expired in September 2021, qualified businesses, companies, and employers can still file paperwork and retroactively receive claims for the ERTC in 2023. To do so, business owners must file IRS Form 941-X which is used to make corrections to their originally filed Form 241s. However, this can only be done up to three years after they originally filed their payroll tax returns. 

According to the IRS, “For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date.” 

In other words, Forms 941-X for eligible quarters in 2020 must be submitted to the Internal Revenue Service by April 15, 2024. In the same way, the ERC tax deadline to claim ERC funds for eligible quarters in 2021 must be submitted by April 15, 2025.

Upcoming Deadlines to File for the ERC

• Eligible employers who want to claim ERC funds for Q2, Q3, or Q4 in 2020 must submit Form 941-X by April 15, 2024.
• Eligible employers who want to claim ERC funds for Q1, Q2, or Q3 in 2021 must submit their Form 941-X by April 15, 2025.

Eligibility for Employee Retention Credit

There are very specific eligibility requirements for claiming the ERC. If your business is eligible, the business owner can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and December 31, 2021. 

To be eligible, an employer must have either:

• Sustained a full or partial suspension of operations due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021, or
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

Employers Whose Business Was Fully or Partially Suspended Due to Governmental Orders

If your business was forced to close under a government-mandated shutdown order or was able to stay open under a partial shutdown order, you could be eligible for the ERC. For details regarding qualifying government orders and full and partial suspensions, see IRS.gov.

Employers Whose Business Experienced a Significant Decline in Revenue

If your business saw a significant decline in gross receipts or total revenue, as compared to 2019, without subtracting any costs or expenses, you may be eligible for the ERC. Businesses that experienced either of the following may be eligible to receive the Employee Retention Credit:

• Total revenues for quarters in 2020 must be at least 50 percent lower than compared to the same quarters in 2019, or
• Total revenues for quarters in 2021 must be at least 20 percent lower when compared to the same quarter in 2019.

Recovery Startup Businesses

A recovery startup business is a business or organization that began carrying on a trade or business after February 15, 2020 and had average annual gross receipts of $1 million or less for the three years preceding the quarter for which they are claiming the ERC. The business does not need to specifically relate to pandemic relief or recovery efforts to be eligible.

To be eligible as a recovery startup business, you cannot be eligible for ERC under the full or partial suspension test or the gross receipts test. A recovery startup business can claim ERC only for the third and fourth quarters of 2021 and may claim a maximum of $50,000 of ERC per quarter.

Additionally, you should consider whether you need to coordinate with another part of your business, such as if you are part of an aggregated group. For more information about aggregation rules, see IRS Notice 2021-20 and Notice 2021-49, Section III.D.

Filing for the ERC

First, determine your business’s eligibility and that you meet the IRS qualifications; otherwise, your paperwork will not be accepted. 

Next, you can file for the credit. Originally, employers were able to claim the Employee Retention Credit when they filed quarterly taxes through Form 941. The deadline for the ERC ended on September 30, 2021. However, employers can amend previously submitted forms by filing and submitting Form 941-X to retroactively claim the ERC. This can be done for up to three years after the original tax forms were filed. Generally, for the 2020 tax period, the deadline is April 15, 2024. For the 2021 tax period, the deadline is April 15, 2025.

Getting Your Employee Retention Credit

On September 14, 2023, the IRS announced an immediate moratorium on processing new ERC claims due to the time required to verify claims and protect against fraud. The IRS is processing ERC claims received before September 14. However, processing has slowed because of the complexity of the amended returns and the increase in misleading marketing campaigns that entice taxpayers into claiming the ERC when they are not eligible.

Schedule a Tax Consultation with Our CPA Firm in Raleigh

If you have questions about your eligibility for the Employee Retention Credit or other questions related to your tax return, turn to a reputable CPA in your area. If and when our schedule allows, the CPAs at Steward Ingram & Cooper, PLLC will provide tax consultation and tax preparation services in and around the Raleigh area. We are committed to helping our clients minimize their tax liability and make smart choices for the future. Schedule a consultation today by calling  (919) 872-0866 or filling out the form below.