The Employee Retention Credit or ERC is an element still in play from the CARES Act that was the Congressional response to the Covid pandemic. Originally, it was set to expire at the end of 2021. However, there are still many millions of dollars waiting to be asked for and claimed.
According to the National Federation of Independent Business or NFIB, less than 5% of small business owners have any idea there is money that can be applied for.
My cousin in Orlando, Steve Saker, who like me has spent most of his adult life as a financial entrepreneur, has found a way to help small business owners apply for and hopefully receive funds if they qualify. The bucket of money will probably be empty by this time next year so don’t sit back and wait for someone to simply show up with a check.
Know too that of the successful applicants today, the average credit which appears in cash is in the range of $250,000. If you can walk away from something like that, good for you.
Government regulations can be confusing and intimidating, especially with constantly changing rules and deadlines. Read on and hopefully understand what is happening with the Employee Retention Tax Credit (ERTC).
The ERTC retroactive period’s original deadline of January 1, 2022, changed to October 1, 2021. There are also qualification changes.
What Is the Employee Retention Tax Credit?
The Coronavirus Aid, Relief, and Economic Security (CARES Act) developed the ERTC. Becoming law in March 2020, the CARES Act helped businesses keep employees on the payroll.
Other laws impacting the act include the Consolidated Appropriations Act 2021 (CAA) and the American Rescue Plan Act (ARPA). Both acts amend and extended credits and advance payments through 2021.
Under the ERTC, small to mid-size businesses became eligible to receive up to 50% of qualifying wages paid from March 13th to December 31, 2020 (later extended to 1/01/2022). This includes employers receiving a loan under the Paycheck Protection Program (PPP). The maximum is $10,000 in wages per employee.
The CAA increases the tax credit to 70% for employee wages paid through the end of 2021, including some health insurance costs. This credit is for a maximum of $10,000 in wages per employee per quarter during the first two quarters of 2021.
What Is the Infrastructure Investment and Jobs Act?
The Infrastructure Investment and Jobs Act, H.R. 3684 passed congress on December 2, 2021. Title VI—Other Provisions, §80604 of the act covers termination of ERC for employers subject to closure due to COVID-19.
This section revises the deadline to October 1, 2021. The exception is wages paid by a recovery startup business. For those businesses, the original deadline of January 1, 2022, remains in place.
Recovery startups are no longer subject to gross receipts reduction or business closure to qualify. All recovery startups are eligible in the 4th quarter of 2021.
The elimination of the fourth quarter of 2021 impacts most businesses by reducing the maximum credit eligibility amount from $28,000 to $21,000. The change can be detrimental to businesses basing their financial expenditures on the belief they will receive fourth quarter ERC.
Who Qualifies for Employee Retention?
The determination of eligibility is based on 2019 records. Businesses with 500 or fewer employees during 2019 may qualify. To be eligible, gross receipts in 2020 or 2021 must be at least 20% lower per quarter than the same quarter in 2019.
Businesses with 100 or fewer full-time employees may qualify for a 100% employee wage credit. This is applicable whether the business is open for business or subject to a shutdown order.
Businesses with more than 100 employees qualify if they pay employee wages when not providing services due to COVID-19 circumstances.
To qualify the business must be in the private sector or a tax-exempt organization encountering in 2020 or 2021:
- A full or partial shutdown of operations because of government limits on commerce during COVID-19
- Gross receipts of 50% or less than the same calendar quarter in 2019
- A “recovery startup” launching after February 15, 2020, with annual gross receipts of $1 million or less with an ERC cap of $50,000
If your business recovered from a substantial decline in gross receipts and you did not claim the credit, you can claim it in 2022. Businesses have three years after the program ends to look back at wages paid after March 12, 2020, to determine eligibility.
The IRS release of Revenue Procedure 2021-33 on August 10, 2021, provides a safe harbor for employers. This allows employers to exclude the amount of:
- Forgiveness of a PPP loan
- Amount of a Shuttered Venue Operators Grant
- Amount of a Restaurant Revitalization Fund Grant
These funds do not need to be part of gross receipts when determining eligibility to claim ERTC. You must apply for the safe harbor across all entities.
How Does the Employee Retention Tax Credit Work?
Various factors go into calculating the retention credit. Qualifying wages must be paid between March 12, 2020, through September 30, 2021 (December 31, 2021, for recovery startups). Credit is only applicable to wages not forgiven under PPP.
Determining health expenses that qualify depends on specific circumstances. This includes employee and employer pretax portions, not after-tax amounts.
To receive the ERTC businesses must monetize the credit for every payroll period by filing a quarterly payroll tax return using Form 941. The business monetizes the credit by retaining the payroll taxes it withholds from employee wages.
If a business pays out $100,000 in payroll, they can expect a $70,000 credit. With ERTC they keep the payroll taxes as a credit advancement. The company can use that money for business operations.
Early termination of ERC means businesses now owe the government payroll taxes withheld for the 2021 fourth quarter. By failing to deposit payroll taxes the company is subject to a 10% penalty.
You May Still Be Eligible
Despite the expiration date of October 1, 2021, you can still take advantage of the employee retention tax credits if your business is eligible.
If you didn’t previously file for the credit you may file for a retroactive ERTC refund. To file retroactively you submit an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, Form 941-X. There is a three-year deadline from the date of your original filing.
IRS Notice 2021-49
Notice 2021-49 from the IRS provides guidance on the ERC for employers paying qualified wages between June 30, 2021, and January 1, 2022. The notice covers ERC for 2020 and 2021.
Changes made by the ARPA to the ERC cover 2021 for the third and fourth quarters include:
- Making credit available to employers paying qualified wages between June 30, 2021, and January 1, 2022
- Including “recovery startup businesses” in the definition of eligible employers
- The definition of “severely financially distressed employers” qualifying wages is modified
The ERC does not apply to payroll wages paid in connection with §324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. Further, it does not apply to §5003 restaurant revitalization grants under the ARPA.
The notice clarifies questions that the Treasury Department and IRA have been fielding regarding 2020 and 2021 ERC credits, including:
- How to treat tips under qualified wages and interaction with §45B credit
- Defines full-time employees and full-time equivalents
- Wages paid to majority owners and spouses
- Timing of the qualified waged deduction disallowance
The notice advises whether a taxpayer needs to file an amendment using an adjusted employment tax return.
If a reduction in the employment tax deposits does not cover the credit, the employer may receive an advance payment from the IRS. To obtain an advance payment file the Advance Payment of Employer Credits Due to Covid-19, Form 7200.
All clarifications in IRS Notice 2021-49 apply to the entire ERTC period. If you determine wages were miss-categorized as qualifying for ERTC, you need to file amendments to Form 941.
How To Get an Employee Retention Tax Credit in 2022
If your head is now spinning trying to understand whether your business qualifies for an employee retention tax credit in 2022, or wonder about filing retroactive or amended returns, please reach out to one of us.
Steve Saker (firstname.lastname@example.org) and I (email@example.com) will try and answer your questions and assist you with your application which will hopefully result in significant benefits to you and your business.