What are the eligibility requirements for the employee retention tax credit?
The Employee Retention Tax Credit (ERTC) is a valuable tax credit for businesses affected by the COVID-19 pandemic. It was first included in the CARES Act in March 2020, and it has since been extended until December 2021. The credit is intended to encourage employers to keep their employees on the payroll during the pandemic. In this article, we will go over the most recent ERTC updates, such as the increased credit percentage and expanded eligibility requirements, as well as how to apply for the credit and key takeaways for business owners. Business owners can take advantage of this opportunity to offset payroll costs and support their employees during these difficult times by understanding the updated eligibility requirements and how to apply for the credit.
Eligibility Requirements for the ERTC
Businesses that experienced a decrease in gross receipts during a calendar quarter compared to the same quarter in 2019 are eligible for the ERTC. Furthermore, the company must meet one of the following requirements:
- A government order related to COVID-19 has completely or partially halted operations.
- When compared to the same quarter in 2019, gross receipts decreased by more than 50%.
To qualify for the ERTC, large employers (those with more than 100 full-time employees) must show a decrease in gross receipts of more than 20% compared to the same quarter in 2019.
Businesses that have received a Paycheck Protection Program (PPP) loan are still eligible for the ERTC if they meet the eligibility requirements. Furthermore, the ERTC can be claimed in the same quarter as the PPP loan, and the credit can be used to offset the employer's share of Social Security taxes.
For the year 2020, the ERTC provides a credit of up to $10,000 in wages per employee, and for the first three quarters of 2021, it increases to 70% of up to $10,000 in wages per employee per quarter. This means that the maximum credit per employee in 2020 is $5,000, and the maximum credit in 2021 is up to $21,000 per employee.
How to Apply for the ERTC
Businesses must file Form 941, Employer's Quarterly Federal Tax Return, and claim the credit on their federal income tax return to apply for the ERTC. It's worth noting that the credit is refundable, which means that if the credit exceeds the business's federal income tax liability, the difference can be refunded.
In addition to the Form 941, businesses must provide documentation to support their ERTC claim, such as records demonstrating a decrease in gross receipts and the number of employees on payroll.
It's worth noting that business owners can claim the ERTC on their 2020 and 2021 returns, and even if they didn't claim it on their 2020 returns, they can do so on their 2021 returns.
Key Takeaways for Business Owners
- The ERTC is a refundable tax credit of 50% of up to $10,000 in wages per employee paid between 3/12/20-12/31/20 by an eligible employer, with a potential credit of up to $5,000 per employee for 2020.
- The ERTC credit percentage increased in 2021 to 70% of up to $10,000 in wages per employee per quarter for Q1, Q2, and Q3, with a potential credit of up to $21,000 per employee.
- Startups may be eligible for a credit of up to $33,000.
- The ERTC is funded by the CARES Act and was created to encourage businesses to keep employees on payroll during the COVID-19 pandemic.
- Businesses that have received a Paycheck Protection Program (PPP) loan are still eligible for the ERTC if they meet the requirements.
- The ERTC can be claimed in the same quarter as the PPP loan, and it can be used to offset the employer's share of Social Security taxes.
- Business owners can claim the ERTC on their 2020 and 2021 returns, even if they haven't claimed the credit on their 2020 returns yet.
- The credit has no restrictions on how it can be used, and it is not a loan that must be repaid.
Finally, the ERTC is a valuable opportunity for COVID-19-affected business owners to offset payroll costs and support their employees. Business owners can take advantage of this opportunity and potentially receive significant tax credits by understanding the updated eligibility requirements and how to apply for the credit. It's critical to work with a tax professional to ensure you're meeting the requirements and getting the most out of the ERTC.