Since its original mention in the heat of the Covid-19 Pandemic, the ERTC (Employee Retention Tax Credit) has been extended as part of the Consolidated Appropriations Act of 2021. While eligible employers are no longer under the protection of this order for wages paid in 2022, they can still file claims for the active periods that have passed. However, the rules around employee retention tax credit can be confusing if you haven’t looked at them in depth. If this sounds like you, here are a few reasons why you should read this blog:
- Changes have been made to who will qualify as well as the deadline to claim.
- Find out if any wages paid can be claimed against the Employee Retention Tax Credit (ERTC).
- If you are a small business and experienced financial losses due to Covid-19, you may well qualify.
Read on to find out what you will have to do next and when you can expect to receive the credit.
What Is the Employee Retention Tax Credit?
The ERTC was developed by the Coronavirus Aid, Relief and Economic Security Act (CARES) made law in March 2020 similar to the Paycheck Protection Program (PPP). It works in the following ways:
- 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. This is still a maximum of $10,000 per employee.
Who Qualifies for Employee Retention?
Employee Retention Tax Credits are based on the records of your business from 2019. So you may be eligible if you had 500 or fewer employees in that year. Meaning your gross receipts in 2020 or 2021 must be 20% less than during the same quarter in 2019.
There are a few more additional qualification criteria points:
- If you had 100 or fewer employees in 2019, this may be good news. You may qualify for a 100% employee wage credit, no matter the state of your business now.
- If you had more than 100 employees, you may qualify if you still paid employee wages when Covid-19 stopped your usual business operations.
- Recovery startup businesses that launched after February 15, 2020, can qualify. They must also have annual gross receipts of $1 million or less. The ERTC will be capped at $50,000 for these businesses, though.
How Does the Employee Retention Tax Credit Work?
Claiming the ERTC depends on refundable payroll tax credit must happen during a specified time. Qualified wages must have been paid between March 12, 2020, and September 30, 2021. The qualified business must then file a quarterly payroll tax return using Form 941. However, they can keep payroll taxes because the amount in question will depend on how much was paid out in each calendar quarter.
If a business pays out $100,000 in payroll, they could get a $70,000 credit. You can use this for business operations, but not for anything else. There may be related health insurance costs that qualify. These will be determined by the pre-tax amounts and not after-tax.
Common ERTC Questions
Who Qualifies for the Employee Retention Credit?
To qualify, you must prove that you faced economic hardship because of the impact of Covid-19. If you had a decline in gross receipts because of a shutdown, for instance. This could also be because of travel restrictions or a reduction in commerce.
What is the Deadline for the Employee Retention Credit?
The deadline was December 31, 2021. This does not mean you cannot still claim retrospectively. The most important consideration is that you qualify. If your gross receipts were much lower in 2020 or 2021 than during the same calendar quarter in 2019, you may well be eligible.
Can I Claim Employee Retention Credit and PPP?
If you took the Paycheck Protection Program (PPP) loan you can still get qualified wages paid as ERTC. This was not the case to begin with, but since the CAA act was passed, you can claim both. This is, of course, as long as you qualify.
What Can I Spend the Employee Retention Credit On?
The ERTC is to cover losses made due to the impact of the pandemic. This means you must use it to make up for shortfalls. It is not free money to spend on holidays, cars, or whatever you see fit. It is a fully refundable tax credit. This means if you qualify you will receive up to 50% of $10,000 per employee per quarter when you were impacted.
Can I Still Claim the Employee Retention Credit?
If you are a recovery startup business or other eligible employer, you can claim the credit for wages paid between July 1, 2020, and December 31, 2021. You will need to fill in the appropriate tax return for each quarter in which you were affected during these times. It is worth making the claim as soon as you can. This is because it may be close to a year before you receive the credit.
Do I Have to Pay Back the Employee Retention Credit?
You never have to pay ERTC back. Rather than a loan, see it as a repayment by the government for your losses. If you think you might have an unpleasant surprise later on, you will not. Still put in your claim. If your employee wages qualify, then you will receive the credit. It is your reward for your business surviving the pandemic. You may have seen a significant decline in your average annual gross receipts. This will help you get back on track.
How Much is the Employee Retention Credit in 2022?
To recap, the largest amount eligible employers can receive is $10,000 per employee per quarter. You may qualify for health expenses through the CAA as well. This is the maximum credit that you will receive. The amount will depend on the number of employees you have and wages paid. There were many severely financially distressed employers during the pandemic. This credit should go a long way toward easing their financial burden.
How Long Does it Take to Get an Employee Retention Credit refund?
You can expect to wait between 6 and 10 months from filing to receive Employee Retention Tax Credit. This will depend on several factors, such as how many claims there are and how complicated your claim may be. Either way, this would be a good estimate of how long the process may take.
Schedule a Tax Consultation with Our CPA Firm in Raleigh
If you aren’t sure whether your business is eligible for the Employee Retention Tax Credit, or if you have other questions related to your tax return, we can help. Our experienced team provides tax consultation and tax preparation services in and around the Raleigh area and we are dedicated to helping our clients minimize their tax liability and make smart choices for the future. Schedule a consultation today by calling (919) 872-0866.