So, what is ERTC? The Employee Retention Tax Credit was established as part of the CARES Act to encourage businesses to keep paying employees. This could be accomplished by granting an employer credit for salaries given to qualifying employees.
The ERTC is not the same as the PPP, despite also being part of the CARES Act. It is an additional credit that businesses may be overlooking without recognizing it. The Employee Retention Tax Credit is a refundable tax credit with a broad base that encourages firms to keep staff on their payroll. It is frequently missed since the CARES Act did not enable enterprises that obtained PPP loans to claim the ERTC when it was initially established. Because it was more advantageous, almost all firms chose the PPP.
What Is The Amount Of The Employee Tax Credit?
The refundable Employee Retention Tax Credit was equivalent to 50% of qualifying earnings eligible firms paid employees when the Govt. brought the CARES Act into law. But according to the CAA, employers who qualify in 2021 can now claim a credit against 70% of qualified wages. The credit currently allows for $10,000 in eligible wages per employee each quarter.
All companies, regardless of size, are eligible for the credit, including tax-exempt organizations. There are just two exceptions which are:
- State and local governments and their agents, and
- Small firms that take out small business loans
To qualify, the employer must pass one of two alternative tests. The tests are determined each calendar quarter if a government order totally or partially halts the employer’s business according to COVID-19 during the calendar quarter. Or if the employer’s gross revenues were less than 50% of the same quarter in 2019. Once the employer’s gross receipts exceeded 80% of a similar quarter in 2019, they are no longer eligible at the end of that quarter.
Who Can Get An ERTC?
There is no application for Employee Retention Tax Credit. On the other hand, employers can claim the Employee Retention Tax Credit on their federal employment tax filings. In most circumstances, this entails filing Form 941, Employer’s Quarterly Federal Tax Return. If an employer discovers that they qualify for the credit, they can update their Form 941.
Depending on your business, you may also claim the credit on Form 944, Employer’s Annual Federal Tax Return, or Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees. On your federal employment tax return, provide the entire qualified leave wages. If your federal employment taxes do not cover the payments, you can request an advance of the credits by completing Form 7200, Advance Payment of Employer Credits Due to COVID-19.
What Do You Have To Do?
Fill out Form 7200 as soon as possible after concluding the quarter in which you paid the eligible salaries. Don’t forget to account for the advance amounts when filing Forms 941, 944, or 943. The IRS states that Form 7200 can be used to obtain an advance payment for the ERTC until August 2, 2021. Furthermore, new enterprises incorporated after December 31, 2020, cannot file Form 7200 to request an advance payment of the Employee Retention Credit.
Employer eligibility for the ERTC is determined by one of the following characteristics, and one of these elements must be present in the calendar quarter in which the employer chooses to use the credit:
- Due to governmental directives, businesses have had their activities completely or partially interrupted or have had to decrease their hours
- Businesses that have started a trade or company after February 2020
- Businesses that saw a 50% decrease in 2020 in comparison to 2019
- Businesses that saw a 20 percent decrease from 2019 to 2021
- Recovery Only for the third and fourth quarters of 2021
- Businesses that suffered a large drop in quarterly gross income compared to 2019
- Businesses that have yearly gross receipts of less than $1 million
How Is Employee Retention Tax Credit Calculated?
The credit equals 50% of eligible earnings paid up to a total of $10,000. It applies to earnings paid after March 13 but before December 31, 2020. The definition of qualifying salaries changes depending on whether a firm had more or less than 100 workers on average in 2019. If the firm had 100 or fewer workers on average in 2019, the credit is based on wages given to all employees regardless of whether they worked. In other words, the employer still receives credit even if the employees worked full-time and were paid for it. If the firm employed more than 100 people on average in 2019, the credit is only available for salaries given to workers who did not work during the calendar quarter. Wages include not just monetary compensation but also a percentage of the cost of employer-provided health care in both circumstances.
Can You Get ERTC and the PPP?
When requesting PPP forgiveness, eligible enterprises can claim the ERTC on earnings that are not spent for payroll expenditures. Businesses can examine their payroll expenditures to see whether they can get 100% PPP debt forgiveness and optimize their ERTC. Businesses can declare up to 40% of eligible non-payroll expenditures on their PPP debt forgiveness application.
IRS Form 941 is used to claim the ERTC. An eligible firm may deduct the authorized ERTC amount from its federal employment tax contributions. If the ERTC exceeds the remaining federal employment tax payments for that quarter, the firm may file Form 7200 to request an advance refund. A form 941-X must be filed to claim the ERTC for previously filed quarters.
Conclusion
Every business that may be eligible is encouraged to get better familiar with the Employee Retention Tax Credit regulations to evaluate eligibility. The ERTC can issue large reimbursements dependent on the number of employees and the number of qualifying quarters. Furthermore, there are intricacies to optimizing the program, so every company should learn about it and analyze the potential. Eligible firms can file an updated Form 941 for earlier quarters, participate in the program, and recover tax refunds to help them survive and thrive in these difficult times. TPG can walk you through the entire process; just give us a call.
