Have you suffered revenue losses due to the pandemic? Have you received loans or grants to help keep your doors open and keep workers? If so, you may qualify for the Employee Retention Tax Credit.
If you aren’t familiar with this credit, it can save on your tax bill. Keep reading to learn how to claim the ERTC.
Overview of the Employee Retention Tax Credit (ERTC)
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Its goal was to help businesses facing financial loss due to the COVID-19 pandemic.
The ERTC, part of the CARES Act, established a refundable payroll tax credit. The purpose was to promote employee retention.
On March 1, 2021, the IRS released Notice 2021-20. This tax credit applies to all qualified wages paid between March 12 and December 31, 2020. It includes employee and employer pretax health insurance expenses.
When applying for the ERTC, employers must identify the number of full-time workers. This included those who worked at least 30 hours a week or 130 hours per month during 2019.
As the pandemic has continued through 2021, more acts and revisions are now in place. The following describes the key facts about the ERTC.
1. Relief Act Section 207
Section 207 of the Relief Act amended the CARES Act Section 2301. Eligible employers who retained employees could now receive ERTC through July 1, 2021.
2. Revenue Procedure 2021-33
On August 10, 2021, the IRS enacted Revenue Procedure 2021-33. It offers safe harbor for employers. This means you can exclude COVID-related support from your gross receipts when claiming an ERTC.
Examples of COVID-related support includes:
- Paycheck Protection Program (PPP) loan
- Shuttered Venue Operators Grant
- Restaurant Revitalization Fund Grant
Only make this claim for a specific calendar quarter on your employment income tax. Remember, that you can’t exclude this income for other federal tax purposes.
Eligible entities now include specific government and tax-exempt organizations. They must also satisfy other relevant ERTC rules. Thus, colleges, universities, and medical or hospital facilities qualify.
The “General gross receipts test” evaluates gross receipt declines during any applicable quarter. The definition of a decline is 80 percent lower gross receipts compared to the same quarter in 2019. If you weren’t in business in 2019, the IRS does a comparison instead of looking at 2020.
For the first two 2021 quarters, businesses can claim other credits. These include your share of Social Security tax or an equal amount for the Railroad Tax Act part.
The ERTC has a maximum limit for the first half of 2021. You can only claim 70 percent of up to $10,000 for qualified employee wages per quarter.
3. IRS Notice 2021-49
In August 2021, the IRS Notice 2021-49 changed the ERTC for the third and fourth quarters of 2021.
This Notice allows employers to claim the ERTC against their share of Medicare tax. They may also claim the same portion of Tier 1 tax for the Railroad Retirement Tax Act.
The ERTC maximum limit for qualified employee wages claimed per quarter continues. As with the first two quarters, you can list 70 percent up to a max of $10,000.
Eligible employers now fall into three general categories.
Some companies faced partial or full stoppage of trade or business operations. In these cases, a governmental authority imposed these restrictions. This applies to limitations on group meetings, travel, or commerce due to COVID-19.
Financially Distressed Businesses
Any business that recorded a decrease in gross receipts during the pandemic. These losses are subject to Notice 2021-20 and 2021-23 rules.
Recovery Startup Businesses
Recovery startup businesses exclude government limited or financially distressed businesses. Company operations must have started after February 15, 2020, to qualify. Recovery startup businesses have a max of $50,000 per quarter after the $10,000 wage max.
4. Employee Retention Tax Credit and PPP
Were all expenses that met PPP forgiveness, included in your loan forgiveness? If they weren’t, include them as gross income when claiming an ERTC.
Check if all non-payroll costs were on the PPP loan forgiveness application. Examples include rent, operating expenses, and utilities.
5. Rules Regarding Tip Wages
Tip wages are part of the eligible wages. Restaurants may claim all customer tips that exceed $20 per month. You can take both section 45B credit and ERTC for the same tip wages.
6. Are Owner/Spouse Wages Eligible?
The ERTC only applies to majority owners or their spouse’s wages in certain instances. If the owner has siblings, half-siblings, ancestors, or descents they’re not eligible. If they have no family, they are eligible.
7. Employee Retention Tax Credit Form
To file an ERTC claim, complete Form 941, Employers Quarterly Federal Tax Return. This form reports qualifying wages and other tax credits related to COVID-19. It includes credits for employee sick leave and family medical leave.
Submit a form for individual quarters when filing income and FICA taxes. You’ll report the FICA and income tax withheld from employee wages and FICA taxes paid. Send this form to the IRS within 30 days after the quarter ends.
If you make a mistake on Form 941, you’ll need to submit Form 941-X. You may correct the following items.
- The total wages, tips, or other compensation and the amount of income tax withheld
- Taxable social security wages
- Taxable social security tips
- Taxable Medicare wages and tips
- Any taxable wages or tips subject to extra Medicare tax withholding
- Tax credits to qualified small business payrolls for increasing research activities
- Any remaining COBRA premium assistance payment credits
The deadline for submitting Form 941-X depends on the discovery date and type of error.
If the mistake involved over-reporting taxes, you have two choices. You may record an interest-free adjustment on the current Form 941 you’re completing. Or you can request a refund or abatement.
For underreported taxes, complete Form 941-X and send the extra amount due. Submit it with your Form 941 for that quarter. Each quarter with a mistake requires a separate Form 941-X.
For errors impacting employee withholdings, include written consents from the affected workers. If you can’t get employee consent, only make corrections to the employer part.
Do You Need Help with the Employee Retention Tax Credit 2021?
The Employee Retention Tax Credit continues to change as the pandemic evolves. It’s difficult for business owners to keep up. Valor Payroll Solutions offers expert solutions to make payroll simple.
Our skilled team works with small business owners to develop tailored business solutions. This includes but isn’t limited to timekeeping and HR compliance. We also provide experts in payroll tax compliance and consulting.
Contact us today to learn how we can help.