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Employee Retention Credit Guide: How to Claim ERTC in 2022

Despite the ERTC expiration in 2021, companies can nevertheless apply for the tax credits in 2022, on a retroactive basis, and we will explain how to apply for the retention credit retroactively. Since it is the practice of the Internal Revenue Service (IRS) to allow three years for return revisions via Form 941X. Rules and eligibility are accessible here. You can learn how to apply for the employee retention credit and lower your federal employment taxes on wages paid with this tax credit. Here is a quick look at how to apply for employee retention credit.

how to apply for employee retention credit

What Is the Employee Retention Credit?

The ERC credit is an ad hoc congressionally-backed tax credit against business payroll taxes, namely those collected for Social Security tax, but not Medicare. During its duration, it grew in length and scope before its termination in late 2021. While many COVID amelioration programs were PPP loans, ERTC credits do not demand any restitution as they are not PPP loans in nature — they are tax credits.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) included ERTC to help business entities retain employees when work slowed or even stopped. With the Cares Act credit, an eligible employer received the equivalent of one-half of qualified wages paid to employees from March 13th to December 31, 2020. 

Employers who benefited from a Paycheck Protection Program (PPP) loan are now, but were not always, eligible for the ERTC in some cases. The maximum credit (for ERC) for the employer is up to $26,000 per employee. Although the ERTC coverage period is terminated, companies can learn how to apply for this employee retention credit retroactively and enjoy this lucrative tax credit on wages paid.

What Employers Are Eligible for the Employee Retention Tax Credit?  

A broad range of businesses and other institutions can avail themselves of the ERTC. This is due to the eligibility expansion provided by the American Rescue Plan Act of 2021. The criteria for qualification are simple. Either the organization’s regular operations were significantly interrupted because of COVID restrictions, or they experienced a critical decline in revenue as a result of the coronavirus. The burden on business owners is to connect the dots between operational cessation or income decline and the COVID-19 pandemic.

Business Disruption

An establishment that either curtailed or stopped operations because of a government dictates or ordinance is eligible for some offsetting credit relative to the time its functions were diminished or stopped altogether. It need not always be the direct result of public order, but instead an economic after-effect. 

These are legitimate recipients of credits for portions each quarter they were hobbled or shut down. For example, some companies were shut down completely in the third and fourth quarters. However, this eligibility is not absolute. There are other considerations that can render you to not be an eligible employer:

  • If the company or agency performs an essential service and remains at full capacity unless a supply shortage or other problem limits the services.
  • If the organization can do business while its workforce makes their contributions remotely by means of computer technology. Many firms were able to do this in 2020-2021, and thus employee wages were paid.  
how to apply for employee retention credit retroactively

Shrunken Revenue

A major drop in annual or calendar quarter gross receipts also suggests company eligibility for the ERTC. An IRS rule instituted in the summer of 2021 allows employers to exempt any PPP forgiveness amounts from the annual gross receipts of an organization. Fortunately, it's easy to perform a gross receipts test. 

Other exclusions are monies from the Shuttered Venue Operators Grant or an allocation from the Restaurant Revitalization Fund. These refer to programs targeted at eateries, taverns, clubs, recreational facilities, sports venues, and other places that need customers present and on-site to earn money, and thus can qualify as eligible employers. In other words, there is no way such businesses can function with staff working remotely.

Thus, public laws and ordinances that prevent gathering cause a severe loss of income for such entities. It helps them to know how to apply for the Employee Retention Credit in anticipation of re-opening and fielding a full workforce.

Common Industries that Qualify for ERTC

While eligible employers are determined on a case-by-case basis, there are business and public sectors that are more likely to receive the ERTC than others. Eligible employers include:  

1. Car Washes, Auto Repair, and Body Shops - the pandemic put a damper on traffic as more people worked from home, if at all. This slowed business for automobile servicing businesses and caused them to need fewer full-time employees and fewer wages paid.

2. Restaurants and Bars - gathering places where customers can socialize and enjoy food and drinks were shut down by government authorities in many jurisdictions, while others experienced a significant decline in business. In some places, they were able to remain open, but with severe restrictions on crowd size, with an emphasis on social distancing, and wages paid dropped significantly.  

3. Religious Buildings - houses of worship were also subject to closure by the government to inhibit the spread of the coronavirus in close-quarter environments. This includes sacred services and regular full-time employees that work through the week.

4. Homebuilders, Construction Firms, and Contractors - many building and maintenance professions suffered from a slowdown during COVID-19. With so many unknowns about COVID, residential and commercial property business operations were put on hold, and wages paid dropped.

5. Moving and Shipping Companies - these businesses experienced a significant decline in revenue along with a decline in real estate market activity and commercial transactions.

Similarly, hotels, dry cleaners, health clubs, and retailers suffered a decline in customers and income. Many private healthcare practitioners resorted to telephone examinations and diagnoses, further reducing their incomes from pre-COVID levels. Patients delayed regular dental cleanings and check-ups, as well. Meanwhile, hospitals prohibited visitors, so cafeterias and coffee shops within were shuttered for months.

how to apply for employee retention tax credit

What Are Qualified Wages for the Employee Retention Credit?

If the employer is an eligible ERTC recipient, whatever wage payments to employees made after March 12, 2020, and before January 1, 2021, qualify. This assumes that the business either suffered a hard reduction in income or its workings were shut down altogether. The ERTC constitutes a tax refund and can give back up to $26,000 per employee ($11,000 or vicinity, most often) contingent upon if wages qualify, health benefits, paid sick leave, and other human resources expenses that business owners invested. The ERTC is open to all categories of business, independent of magnitude or market sector.

How to Calculate Your ERTC Amount: an Example

How to apply for an Employee Retention Tax Credit begins with understanding how much a business is due. Working out the figures that constitute the ERTC is best done by way of illustration, and you must start with how many full-time employees you have:

For example, small businesses with 10 full-time employees pay $50,000 to each employee annually. Meeting the criteria for ERTC for all of 2020 and three quarters of 2021, the company pays each worker $12,500 per quarter. This totals compensation of $125,000 every three months. The ETRC credits 50 percent of the total quarterly payouts, i.e., $62,500. So, the company would be credited $6,250 per employee for the year 2020.

As noted above, however, the ETRC calculations were adjusted over the course of its life. Accordingly, the 2021 factor increased from 50 percent of quarterly wage disbursements to 70 percent. $125,000 x 70 percent yields $87,500, or $87,500 for each employee.

How to Claim the ERTC in 2022

Bear in mind that the ERTC is not a credit against income tax, but against the employment tax deposits such as contributing to Social Security and Medicare, generally for a full-time employee but not necessarily. Any qualified wages paid during the effective dates of the ERTC are still subject to ordinary levies on taxable income. To claim the employer credits for a given calendar quarter, on qualifying wages paid, you must proceed thusly:

  • Discern whether the company qualifies for ERTC regarding the quarter(s) in question.
  • Find out the amount of qualifying wages paid for that same calendar quarter.
  • Any qualifying wages paid that come from the Paycheck Protection Program must be excluded from the ERTC calculations.
  • Use the calculation formulas as presented above: 50 percent of total quarterly. compensation for 2020; 70 percent of total quarterly compensation for 2021.
  • Make sure the actual credit reflects any cash advance payments requested from the IRS.
  • Record these figures on IRS Form 941X.
  • Include corroborating documents when sending the form in.
how to claim the employee retention credit

FAQs on ERTC

What is the deadline to file for the Employee Retention Tax Credit?

Since the ERTC was subject to adjustments and tweaks, its durations and deadlines did not remain fixed throughout its lifetime. In late 2021, the sunset of the credit was moved from 12/31/2021 to 9/30/2021. Important to understand is that this modification simply shortened the number of months (or quarters) covered by ERTC.

It in no way prohibits anyone from still filing to get the benefit for those quarters covered. However, the time frame to amend a business tax return is not open-ended. The IRS usually allows for up to three years to elapse before such revisions are no longer accepted.

Is the ERTC itself taxable income?

The purpose of the ERTC is to reduce the tax burden rather than add to it. It allows a full-time employee or part-time one to keep getting paid, in whole or in part, despite business interruptions. Those wages are then written off by employers as business expenses deductible under IRS rules. In any event, receiving a credit against Social Security taxes is not defined as taxable income by the Internal Revenue Service. In short, the ERTC takes unexempted taxes that were previously collected and returns them to the employer as exempted during the quarter for which they applied for the credit.

What can I spend the employee retention credit on?

The Employee Retention Credit is not a conventional tax refund. More accurately, the ERTC is a recompense made for the singular purpose of retaining workers during business slumps related to the coronavirus pandemic. So, these funds must go to salaries or wages, directly or indirectly. Employers who fully funded staffer compensation during the pandemic, without any credits or federal assistance, must nevertheless reserve any monies accrued by means of the ERTC for employee remuneration. Obviously, this boost might free up funds directed at other line items in a company budget.

Do I have to pay back the Employee Retention Credit?

Some business owners confuse the Jobs Act, the ERTC, and PPP. Whereas a PPP loan is something that employers qualify for, by providing PPP loan documents, carrying the potential for PPP loan forgiveness that allowed for eight weeks of personnel costs, benefits included such as qualified health plan expenses, and health insurance costs, the ERTC is a payroll tax credit that relieves some of the expenses born by an employer on behalf of a workforce. As reimbursement for not laying people off, the government lifts some of the financial burden from small business owners through the ERTC. Therefore, no recipient owes anything back after securing the ERTC. Whereas PPP is a loan, ERTC is a grant and just a payroll tax credit that helps business owners alleviate the pain of payroll costs.

Is the ERTC itself taxable income?

The purpose of the ERTC is to reduce the tax burden rather than add to it. It allows a full-time employee or part-time one to keep getting paid, in whole or in part, despite business interruptions. Those wages are then written off by employers as business expenses deductible under IRS rules. In any event, receiving a credit against Social Security taxes is not defined as taxable income by the Internal Revenue Service. In short, the ERTC takes unexempted taxes that were previously collected and returns them to the employer as exempted during the quarter for which they applied for the credit.

What can I spend the employee retention credit on?

The Employee Retention Credit is not a conventional tax refund. More accurately, the ERTC is a recompense made for the singular purpose of retaining workers during business slumps related to the coronavirus pandemic. So, these funds must go to salaries or wages, directly or indirectly. Employers who fully funded staffer compensation during the pandemic, without any credits or federal assistance, must nevertheless reserve any monies accrued by means of the ERTC for employee remuneration. Obviously, this boost might free up funds directed at other line items in a company budget.

Is the ERTC itself taxable income?

The purpose of the ERTC is to reduce the tax burden rather than add to it. It allows a full-time employee or part-time one to keep getting paid, in whole or in part, despite business interruptions. Those wages are then written off by employers as business expenses deductible under IRS rules. In any event, receiving a credit against Social Security taxes is not defined as taxable income by the Internal Revenue Service. In short, the ERTC takes unexempted taxes that were previously collected and returns them to the employer as exempted during the quarter for which they applied for the credit.

What can I spend the employee retention credit on?

The Employee Retention Credit is not a conventional tax refund. More accurately, the ERTC is a recompense made for the singular purpose of retaining workers during business slumps related to the coronavirus pandemic. So, these funds must go to salaries or wages, directly or indirectly. Employers who fully funded staffer compensation during the pandemic, without any credits or federal assistance, must nevertheless reserve any monies accrued by means of the ERTC for employee remuneration. Obviously, this boost might free up funds directed at other line items in a company budget.

How much is the ERTC credit in 2022?

As demonstrated above, the amount received for the ERTC is dependent on how many quarters a company qualifies for what the total employee compensation amounts to, and which year the subject quarters fell within (2020 or 2021?). Remember, though, that on a per-employee basis, the federal government does not reimburse above $26,000. With this in mind, business owners can determine if the ERTC will provide needed recompense for monies lost during the worst of COVID-19.

How long does it take to get an employee retention credit refund?

The answer to this question is contingent on the date of filing and the complexity of the credit application as represented by IRS Form 941X. With those factors in mind, business owners generally receive the ERTC reimbursement as early as six and as late as 10 months from the date of filing. Requests for the maximum tax credit may be more or less complex due to variables such as:
  • Whether or not the company participates in a PPP loan
  • Whether or not the business is getting any credits under the Families First Coronavirus Response Act
  • Whether or not the business gets a Work Opportunity Tax Credit
  • Whether or not the company collects paid family and medical leave under section 45S of the IRS Code
These conditions may or may not disqualify an otherwise eligible employer from enjoying this valuable tax credit.
employee retention credit

Get Expert Help Navigating the ERC Credit from CPA Firm!

Clearly, there is more to applying for and getting the Employee Retention Tax Credit than simply having qualified wages. Fortunately, there are tax professionals who are seasoned and trained in the ins and outs of this important employment tax credit.

Employee retention credit services are available in the Chicago area and nationwide at Lewis.cpa. If you believe your firm meets the eligibility requirements, reach out to us today for a consultation, so we can help with everything, including the PPP loan forgiveness application, and get you the tax credits you deserve.

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