In one of the most sweeping business stimulation measures in the history of the United States, the U.S. Congress instituted the Employee Retention Credit (ERC) as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. Keeping workers compensated was of immediate concern to lawmakers in the face of a raging COVID-19 pandemic. At its core, the Employee Retention Credit was designed to incentivize hard-pressed companies to give their employees much-needed financial relief. In summary, the refundable tax credit offsets payroll taxes assessed against a firm if that firm carries its employees during a period of shutdown or reductions. Eligible employers can obtain this benefit, and enjoy this refundable payroll tax credit.
The U.S. Internal Revenue Service, or IRS, has a charge over granting the ERC. While the eligibility period was originally from March 2020 to December 2021, the American Rescue Plan Act retroactively terminated that period to September 2021. This means that any eligible employer can claim the Employee Retention Tax Credit if it can demonstrate the detrimental effects of the pandemic on gross receipts during that time on its operations. The IRS will evaluate the evidence and decide whether to issue the credit and will want to see that business was adversely affected by the tax credits.
When the agency approves a business for the Employee Retention Credit, it will issue the credit according to a specific calculation regime that accounts for the number of affected employees and their respective employee wages. First of all, any wages paid from the Payroll Protection Program (PPP), which is another CARES provision, are not qualified wages for the ERC. If the company was paying non-active employees during all or some of the four fiscal quarters of 2020. If furloughed employees received their wages during any calendar quarter in 2020, IRS credits 50 percent to the payroll tax obligation, capped at $5,000 per worker; for any 2021 quarter, the percentage is 70 percent with a maximum of $7,000 per wage-earner per quarter.
Yes, your business can indeed file for an ERTC credit in 2023. Eligible employers can file as late as April 2025 under certain circumstances. Companies have up to three years from the original filing of Form 941 during the period covered by ERC. This means that if you closed or downsized due to COVID in July of 2020, you can claim the tax credit as late as April of 2024 – since quarterly employment taxes are officially counted toward the following April 15th. Likewise, any claims from 2021 must be made by April 2025.
Keeping sidelined employees on active payrolls during the pandemic was deemed an important part of economic survival by the U.S. Congress. Offsetting the financial pain from doing so is the aim of the Employee Retention Credit. In suffering a significant decline in economic activity, small businesses garnered certain benefits:
1. Employers need not go through a long and arduous process of re-hiring when the pandemic and its restrictions recede. Personnel were never separated from the company so this spares the business a slew of human resources red tape. The staff is intact and ready to return when notified.
2. Employers are eligible for the retention tax credit ERTC from $5,000 to $7,000 per employee for each quarter they were not working.
3. Claims on wages paid do not have to wait until April. They can be submitted immediately, if necessary, to lessen short-term payroll costs to the eligible employer.
4. Although the paycheck protection program, or PPP loan, funds are not included among the monies in the ERC calculations, small businesses can benefit from both programs as long as each is applied to a separate calendar quarter or separate employees. Alternatively, qualified wages might be claimed if PPP loan forgiveness is received. This would effectively remove PPP as a factor.
5. The criteria to file for an employee retention tax credit are more flexible than before. A drop of 20 percent in gross receipts in any given quarter – compared to the same calendar quarter in 2019 – constitutes a significant decline in income according to IRS guidelines.
6. Ease of process – if you can file a form 941 each calendar quarter, this is enough for the Internal Revenue Service to decide regarding eligibility. Your payroll provider can also do this since it already possesses the necessary information.
7. In some cases, the credits granted surpass the payroll tax paid, meaning that your business may be due an Employee Retention Credit refund.
Like the national government, state authorities, too, moved to soften the economic blow of the COVID-19 pandemic through a combination of loans, grants, moratoriums, and tax breaks. The State of Illinois was very active in this regard. A company doing business within the Illinois state boundaries might be eligible for a payroll credit of $26,000 per employee. The period of eligibility runs through the second, third, and fourth quarters of 2020. Furthermore, the tax credit can value up to 50 percent of each eligible employee’s salary. In some cases, the company can receive a credit toward future tax bills or get a refund from the Department of Revenue.
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.
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. Other considerations 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 using computer technology. Many firms were able to do this in 2020-2021, and thus employee wages were paid.
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.
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.
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 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 for 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.
Following these steps will increase the likelihood of a successful ERTC claim:
1. Make sure your organization qualifies for the ERC. This means meeting the criteria for affected business, lost income, business size, etc. Assess if there are eligibility standards that must be adhered to before applying. Research if any measures need to be taken before submission to ensure qualifying parameters are met and the maximum amount of benefits can be obtained. Familiarize yourself with key factors such as requirements regarding the number of employees and other operational aspects due to the varying shapes and size characteristics of businesses so you don't miss out on access to alternative support funds available.
2. Make sure you filed an IRS form 941 for each of the affected calendar quarters for which you will seek credit. k. To do this, first, locate and then complete the accompanying worksheet(s). After completing the necessary documentation, double-check to ensure you entered all numbers accurately before filing form 941. By doing so, when it comes time to submit your credit claim, you will be sure you have properly and effectively maneuvered through this important step.
3. File a 941-x form to make the adjustments for the ERC tax credit. In prior times, this form would apply to employees who requested extended sick leave or family leave. The CARES Act, however, expanded its scope to include those employees who were inactive due to legal and economic pressures related to the COVID-19 coronavirus. Form 941-x is receivable up to three years after the quarters in question. This means that you can petition through 2024 to claim the credit for 2020.
4. Confirm that the company has no more than 500 full-time workers on staff. The ERC is aimed at small to medium-sized firms that would otherwise maintain smaller capital reserves. This credit can provide great support and relief if strategically leveraged by firms that are not larger than 500 employees in size. It could be the difference between maintaining a thriving workforce and needing to reduce it significantly, as well as enabling these organizations to retain employee talent as well. The ERC is an important resource for small to medium organizations whose staff sizes cap out at 500, granting valuable economic aid and helping ensure employees remain employed during this period of unrest.
5. Those companies seeking an immediate refund of Social Security taxes already paid can file a Form 7200. Like the 941-x, Form 7200 was created to provide for employees in need of family and/or medical leave. Now, it is useful as a vehicle to request advance payment of credits earned. Form 7200 is easy to fill out, and a professional probably isn’t needed.
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.
The Lewis CPA firm knows the Employee Retention Credit. As professional accountants and tax specialists in practice for over 35 years, we can help you discover if your business is eligible for the ERC and help you claim this helpful benefit. Reach out to us to find out how, and whether you qualify or not, there is no charge to contact us.