What is the Employee Retention Tax Credit (ERTC) and How to Claim the Benefit
Uncharacteristically, the US Treasury took rapid and decisive action to help ameliorate the economic impact of the Covid Pandemic. Many feel the quick action was of great assistance to the economy. Indeed, many are also uncertain if more federal help might be needed in the future.
The CARES Act of 2020 and updated 2021 version may have saved millions of jobs and thousands of small businesses. And as another potential variant wave of the virus may be upon us, the CARES act and its associated economic relief programs are still in force. In this article, we will discuss two very important aspects of the act that all small business owners should be aware of.
The Paycheck Protection Plan (PPP)
As part of the CARES act, PPP is an SBA-backed loan that helps businesses keep their workforce employed during the COVID-19 crisis. In 2020, participants in the plan needed to spend 60% on payroll and the rest on other qualifying expenses within 24 weeks. Qualifying expenses include utilities, rent, mortgage payments, debt payments, costs of property damage, supplier costs, protection equipment, and some operation expenses like cloud computing. The PPP loan program has recently received an additional $284 billion in funding to provide small business owners with the funds to continue paying their employees and other operational costs. To find more specific information about the PPP and the loan forgiveness program, reach out to the SBA website.
The best thing about PPP loans, they can be up to 100% forgivable; however, the devil can be in the SBA details.
The Employee Retention Tax Credit Program (ERTC)
As an additional incentive for employers to keep W-2 employees on the payroll, the ERTC provides for Tax Credit incentives.
What is a Tax Credit?
A Tax Credit is not an expense deduction and has a much greater impact on a company’s taxation. A Tax Credit is a computed amount subtracted directly from the bottom line IRS income tax liability.
For example, suppose your company owes $2,000 in federal taxes but is eligible for a $1,000 tax credit. In that case, your net liability drops to $1,000. (Of course, a company needs to make a taxable profit to take advantage of the ERTC).
Getting into the Weeds
ERTC Eligibility
The following information is a brief, simplified explanation of how the program works and how to take advantage of the benefit. Most readers will find this a bit tedious, but there are professionals like: ERTCFiling.com, who can make sure you optimize the benefit.
Eligibility for the ERTC, a small company, is defined by the IRS as having 500 or fewer W-2 full-time employees. (1099 contract workers’ wages are not eligible). If your company were in business in 2019, you would need to compare business revenue in 2019 to the period for which ERTC is claimed. Compare your business revenue in each relevant quarter of 2020 or 2021 to the same calendar quarter in 2019. For quarters in 2020, your income must have dropped by more than 50%. For quarters in 2021, your revenue for the current or preceding quarter must have dropped by more than 20%.
How to Compute your ERTC
Limits to ERTC: In 2021, the IRS increased the ERTC from 50% to 70% of the first $10,000 in qualified wages for each employee in every quarter.
To claim ERTC for 2021 wages, the employer fills out IRS Form 7200, Advance of Employer Credits Due to COVID-19 or 941-x amended payroll report, the same ERTC form used in 2020. It is important to note that the March 2021 recovery bill extended the ERTC through December 31, 2021, so the credit applies to 2021 wages in Q1, Q2, Q3, and Q4.
Usually, the employer sends in a form 941 payroll tax form to the IRS each quarter based on the quarterly total w-2 payroll.
The ERTC allows the employer to take 70% of the employer’s calculated employer-paid payroll taxes as a tax credit. However, when a company receives PPP funding, the employer cannot take the ERTC for the period those funds are used.
How to Submit for the ERTC
In order to claim the new 2021 Employee Retention Credit (if an eligible small business), you must calculate your total qualified W-2 wages and the related health insurance costs for each quarter, and subtract that amount from Employer’s Quarterly Federal Tax Return.
Time is running out for the ERTC, Except for a “Recovery Startup Business.”
The Employee Retention Tax Credit will no longer be available for the fourth quarter of 2021 for any businesses except Recovery Start-Up Businesses.
A Recovery Startup Business began operations on or after February 15, 2020, and Maintains average annual gross receipts that do not exceed $1 million.
As with most x government programs, complexity seems to be part of the price you must “pay to play.” For busy owners, perhaps it is best to contact a professional who has experience in quickly helping clients receive what is due to them.
For further information, contact us at ERTCfiling.com.