After more than two years of very challenging business conditions, the last thing you want to do as an employer is to leave money on the table. Unfortunately, that may be exactly what you are doing due to confusion about federal regulations and changing rules!
The Employee Retention Tax Credit (ERTC) was created by Congress to incentivize business owners to keep workers employed through the worst parts of the COVID-19 pandemic and government-forced shutdowns. Although the ERTC expired at the end of September for most businesses, it is not too late to go back and claim the credits. As you are performing your year-end processes, now is the perfect time to think about how the ERTC can help you.
Let’s take a look at the details of the ERTC and how it works.
The ERTC is a refundable payroll tax credit that can be claimed for eligible wages paid from March 13, 2020, through September 30, 2021. Employers who qualify can claim a 50% credit of up to $10,000 of qualified wages paid to each employee between March 13 and December 31, 2020 (making the maximum credit $5,000 per employee in 2020). For the first three quarters of 2021, eligible employers can claim a 70% credit of up to $10,000 of qualified wages per employee per quarter (making the maximum credit $21,000 per employee in 2021!).
To be eligible, businesses must have employees (owners and family members don’t qualify) and meet either of the following criteria:
- Your business operations were suspended due to a government order. For those businesses that were ordered closed by government decree, it’s pretty obvious if you meet this requirement. Many businesses, particularly restaurants and other food or beverage establishments, remained open but only at greatly reduced capacities. You, too, may be eligible to claim this credit.
- Show a decline in gross receipts. For the 2020 ERTC gross receipts test, you must prove that your gross receipts were at least 50% less than what they were in the corresponding calendar quarter from 2019. For the 2021 ERTC gross receipts test, you must prove that your gross receipts were at least 20% less than what they were in either the corresponding calendar quarter from 2019 OR the immediately preceding calendar quarter.
Business owners that started operations after February 15, 2020, enjoy different criteria for eligibility and greater payouts. Recovery Startup Businesses can claim the ERTC for an additional quarter in 2021 with a $50,000 credit cap in the third and fourth quarters. To be eligible as a Startup Business you need to maintain average gross receipts of $1 million or less, have at least one employee who is not at least a 50% owner or a family member of such owner, and would not otherwise qualify for the ERTC.
Even though the ERTC expired at the end of September 2021, you can still claim the credit for prior eligible calendar quarters by amending your quarterly payroll tax forms. You have three years to file an amended return, but because it is a lengthy process and the rules may change again (who knows?!), it is probably best to do this in 2022.
The ERTC rules that were released in 2020 are very different from those currently in place, and this has led many business owners (and their tax advisors) to believe that they are not eligible for this assistance. The changes established in 2021 ensure that many more businesses are eligible.
When the ERTC was first introduced as part of the CARES Act in March 2020, those business owners who took out a Paycheck Protection Program (PPP) loan were not eligible for the ERTC. However, Congress retroactively changed this rule. Today, you can receive (and be forgiven for) a PPP loan without jeopardizing your tax credit. The catch, though, is that you can’t use the same wages to qualify for a PPP loan forgiveness that you use to calculate your credit. The good news regarding the PPP loan is that, in determining whether your business had a 50% decline of gross receipts in 2020 or a 20% decline in 2021, you can disregard PPP loan proceeds.
Are you confused yet? The ERTC legislation is rather dense and the process can be difficult to navigate. Consult with your accountant or payroll service to help determine your eligibility and steps needed to claim this credit. Note, though, many consulting professionals are not familiar with the process–even the large national payroll processors have only processed a small number of claim forms from businesses.
The Chamber is working with a national payroll service to help you receive all the money you are eligible to receive.