Employee Retention Tax Credit: What it is and How it Works

As hundreds of thousands of businesses were financially impacted by the onset of the Coronavirus during tax years 2020 and 2021,the government passed legislation to offer a reprieve and keep the economy from catastrophic failure. One such incentive, the Employee Retention Tax Credit, has been instituted to do exactly that and below you will find key details on eligibility, stipulations, and recent revisions.

What is the Employee Retention Tax Credit? 

The Employee Retention Tax Credit(ERTC) was originally instituted by Congress via The Internal Revenue Service to incentivize employers for keeping their employees on payroll throughout the Coronavirus pandemic. The tax credit, which was created as a part of the CARES ACT, provided eligible companies the ability to retain their staffing and get a portion of paid wages in a refundable tax credit. 

Qualified employers will receive up to 70% of employee wages not to exceed $10,000 per individual for any full-time employees kept on the company’s payroll between March 2020 through December 2020. However, with the passing of the American Rescue Plan Act and Consolidations Appropriations Act, the credit has been extended with updates until January 2022. 

How To Apply for the Employee Retention Tax Credit? 

Employers regardless of size can apply to receive up to half of the wages paid to an eligible employee over the past two years by submitting their payroll and tax information to the Internal Revenue Service via filing the appropriate business tax documents. We have put together a few points to consider if you are seeking to get your business qualified . 

Businesses seeking to qualify should keep the following points in mind:

  • Payroll documentation for all employees will be used to determine credit amounts
  • Employer sponsored health insurance premiums should be taken into consideration 
  • Various forms may be needed dependent upon the type of credit election

What Makes a Business Eligible for the Tax Credit? 

The Employee Retention Tax Credit was intended to provide relief for companies who met certain requirements such as having less than 500 full-time employees, being a small business  (S-Corp, SMLLC, Sole Proprietor), and having a wage reduction in any qualifying quarter when weighed against the same quarter in the preceding year, beginning in 2019. 

Based on new rules created under the Consolidations Appropriations Act earlier this year, additional companies may qualify with retroactive benefits. Our skilled experts can help companies who were previously excluded due to having received Paycheck Protection Program funds to become eligible to apply for the payroll tax credit. 

Additional qualifications have been extended to recovery startup businesses, or companies who didn’t exist at the time of the passage of the CARES Act in 2020 as well as many other entities including but not limited to:

  • Higher education institutions such as universities and colleges
  • Companies with more than 500 employees 
  • Self-employed individuals who had at least one qualifying employee
  • Employers subject to Railroad Retirement Tax Act (RRTA) against tier-one tax

Disqualifying Factors Regarding Eligibility

Although many companies will meet the above criterion, grounds for disqualification still apply. Below are some factors to consider when assessing a tax situation for Employee Retention Tax Credit eligibility. 

  • Company owners claiming their salaries as qualifying wages
  • Relatives or family members in the companies employ with a majority ownership interest
  • Larger companies without more than 500 full-time employees

When you speak with one of our skilled tax professionals, we can help you evaluate your situation and ensure that you can eliminate those barriers.

Correct Calculation of the Employee Retention Tax Credit 

Calculation of the tax credit is highly emphasized when taking into consideration the losses that may be incurred on businesses who incorrectly submit information. In order to avoid assuming an overpaymentpenalty, or underpayment in certain circumstances, accuracy remains highly important when determining the correct amount for eligibility.

Correct determination amounts may be assessed via the following method:

  1. Choose what calendar year employee wages will be used for qualifications.
  2. Determine which sales quarter indicates a sharp deduction when compared to a similar quarter in the following year
  3. Correctly determine that the reduction meets the baseline requirement.
  4. Calculating the amount of qualifying wages per employee based on calendar year
  5. Ensure that the credit amount isn’t in excess of the maximum allotment 
  6. Verify that the quarters being used have not had a rebound of gross receipts above the threshold

We know from experience that a simple error can cost you thousands of dollars, and we strive to help our clients achieve the maximum amount for your business. 

Key Takeaways:

  • Any wages earned by employees after December 31st, 2021 no longer qualify for the Employee Retention Tax Credit
  • Quarters with wages that exceed the threshold amounts may not be used in determining the refund amount

Employers who wish to retroactively claim the credit must submit proper documentation 

Many business owners small and large may benefit from applying for the Employee Retention Tax Credit and those who qualify may recoup funds paid out during a time when fellow businesses were shuttered. When it comes to filing your business taxes, what you don’t know can hurt you. From our perspective, the only questions you shouldn’t be worried about asking are the ones that can lose you money. For further clarification on how much your business can qualify for, speak with a qualified tax professional to file your ERTC credit today