IRS Employee Retention Credit FAQ

These ERTC FAQs were created for business owners looking for detailed information on the IRS Employee Retention Tax Credit Program. We are hopeful this information will help you get the maximum refund available to your business.

If you need more assistance, please visit our home page at federaltaxcredits.org.

Employee Retention Tax Credit Questions Answered

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Who qualifies for ERTC?

To be eligible for an ERTC, a company’s activities during the calendar years 2020 or 2021 must have been interrupted by restricted commerce, travel, or group meetings brought on by COVID-19 and associated governmental directives.

This requirement applies to all employers operating within the US, including tax-exempt organizations.

Employers can alternatively meet the criteria by comparing their quarterly gross revenues to prior comparable quarters and doing so in line with the rules for comparing gross receipts within these particular timeframes.

Nearly all employers in the private sector that experienced significant business losses or had to entirely or partially halt operations because of COVID-19 pandemic limitations are eligible for the ERTC.

The credits are also available to hospitals, 501(c) organizations, universities, and colleges.

All qualified employers can now concurrently apply for a Paycheck Protection Program (PPP) loan and the ERTC, even though this was not possible when the CARES Act was initially passed.

Employers who took out a PPP loan and want to claim the ERTC for prior quarters retroactively can now submit a Claim for Return or Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, for the relevant quarter(s) in which the eligible wages were paid.

What are the new rules for employee retention credit?

With one exception, the ARP Act of 2021 adheres to the same eligibility rules as the Consolidated Appropriations Act.

Organizations can qualify under this Act by comparing their gross receipts from the previous calendar quarter, not merely the equivalent quarter in 2019.

Organizations affected by forced closures and quarantines must see a greater than 20% decline in gross receipts compared to the same quarter in 2019 to be eligible under the Consolidation Appropriations Act of 2021.

An employer qualifies if its gross receipts for a quarter are less than 50% of its gross receipts for the same calendar quarter in 2019.

Compared to the same calendar quarter in 2019, an employer is no longer eligible if its quarterly gross revenues increased by more than 80%.

According to a new law, companies can claim a refundable tax credit of up to 70% of the eligible wages paid to employees for the third and fourth quarters of 2021 (wages received after June 30, 2021, to before January 1, 2022), with a cap of $7,000 per employee each quarter.

There are several methods for calculating qualifying medical costs. In most cases, the pre-tax sums paid by the company or the employee are considered eligible health costs.

Usually, after-tax parts are not acceptable. The size of the company and the number of full-time workers who work 30 hours per week or 130 hours per month also affect the ERTC’s wage requirements.

Is the ERTC still available?

The expiration date for the ERTC was advanced to September 30, 2021, when the Infrastructure Investment and Jobs Act was enacted into law in November of 2021.

Eligible firms can still apply for stimulus cash based on their financials from March 13, 2020, through September 30, 2021, even if they didn’t submit earlier.

Regularly, qualifying health costs and wages, and compensation subject to FICA taxes will be eligible for the ERTC. After March 12, 2020, and before January 1, 2022, these costs had to be paid. There are several methods for calculating qualifying medical expenses.

The retention credit is calculated using several different parameters. Qualifying salaries must be paid from March 12, 2020, through September 30, 2021 (December 31, 2021, for recovery startups).

Only salaries that are not forgiven under PPP are eligible for credit. If your company qualifies, you can still benefit from the employee retention tax credits despite their deadline of October 1, 2021.

You could apply for a retroactive ERTC refund if you didn’t previously submit a claim for the credit.

This also goes for a claim for refund or an Adjusted Employer’s Quarterly Federal Tax Return, Form 941-X, which must be filed to file retroactively. Three years have passed since the date of your initial filing.

When do you have to file ERTC?

If your company qualifies, you can still benefit from the employee retention tax credits despite their deadline of October 1, 2021.

You could apply for a retroactive ERTC refund if you didn’t previously submit a claim for the credit. Eligible firms can still apply for stimulus cash based on their financials from March 13, 2020, through September 30, 2021, even if they didn’t submit earlier.

The ERC is still available to recover starting businesses for wages paid after June 30, 2021, but before January 1, 2022.

Before correctly completing the necessary adjusted employment tax return and submitting it by the due date, you can also claim the ERC for earlier quarters.

There are employee retention credit services that aid businesses in determining their eligibility, finishing a thorough analysis of their claim, offer guidance on the claiming process and documentation.

They can also carry out a quick and easy end-to-end process, from eligibility to receiving your refunds.

For companies paying qualifying wages between June 30, 2021, and January 1, 2022, IRS Notice 2021-49 offers information on the ERC. The warning pertains to the 2020 and 2021 ERC.

Is ERTC only for full-time employees?

Employee Retention Credit is not just for full-time employees. All w-2 part-time or full-time employees, are included in that calculation.

The calculation is a percentage of wages. Fifty percent for 2020 and seventy percent for 2021 of up to $10,000 in wages.

The credit is allowed against the employer portion of social security taxes on wages paid to all employees.

Employers with 500 employees or less qualify for the credit if their operations are suspended due to the pandemic or if their gross receipts declined by more than 50% from the same quarter last year.

The CARES Act specifies the definition of qualified wages differs for companies that average 100 or fewer full-time or full-time equivalent employees versus more than 100 full-time or full-time equivalent employees, based on 2019 averages. 

Smaller businesses under 100 employees, all wages paid to employees (up to the $10,000 per employee limit), qualify during any calendar quarter in which business operations are fully or partially suspended due to a governmental order or the business is experiencing a significant decline in gross receipts.

Large employers above 100 employees are allowed a partial credit for wages paid to employees who continue to work fewer hours. However, the credit is only allowed for the additional wages paid above the employee’s part-time wages.

For any calendar month in 2019, a worker who averaged at least 30 hours of work per week or 130 hours per month, as calculated per section 4980H of the Internal Revenue Code, is referred to as a “full-time employee.” 

An eligible employer is considered a small employer for the 2020 credits if they employ 100 or fewer average full-time workers. If a qualified employer has 500 or fewer typical full-time employees, they are considered a small employer for the purposes of the 2021 credits.

What are considered Gross Receipts for ERTC?

The term “gross revenues,” as used in section 448(c) rules, refers to the total revenue for the taxable year, which typically includes all sales (net of refunds and allowances) and all payments paid for services. Gross revenues comprise any investment income and money from unrelated or external sources.

For instance, regardless of whether these sums are obtained in the regular course of the taxpayer’s trade or business, gross receipts include dividends, rents, royalties, and annuities.

The adjusted basis of the taxpayer in capital assets sold often reduces gross revenues rather than the cost of items sold. Gross receipts exclude any sums used to pay back loans or other obligations.

When a tax is lawfully imposed on an item or service buyer, and the taxpayer collects and remits the tax to the taxing authority, those amounts are not included in gross receipts. Neither are sums received concerning sales tax.

Do you have to pay back ERTC?

Employers who qualify may claim the Employee Retention Credit as a deduction against specific employment taxes. It is not a loan and is not subject to repayment.

Employers may still claim credits even if the ERTC program was terminated on September 30. Although the credit is not taxable, using it results in the disallowance of costs for wages equivalent to the credit, which raises taxable income overall.

Owners of businesses who want to claim the credit for 2020 may need to modify their return to reflect lower costs equal to the credit obtained.

The credit covers the time period the second Quarter of 2020 and through the third Quarter of 2021.

Employers (excluding Recovery Startup Businesses) that sought and received an ERTC advance for wages paid in the fourth quarter of 2021 are obligated to pay back the advances by the deadline for the corresponding employment tax return that covers the fourth quarter of 2021.

According to the IRS, businesses have until December 20 to remit advance payments.
Additionally, fines for payroll tax payments due before December 20 may be avoided for companies who lowered their payroll tax contributions on salaries earned between October 1 and the end of the year.

Is it too late to apply for ERTC credit?

The deadlines for qualifying enterprises to make ERTC claims are July 31, October 31, and December 31, 2021, respectively.

Business taxpayers will require extra payroll information and other documents to submit their quarterly reports for the ERTC.

Even though the ERTC program was discontinued in 2021, the credit may still be claimed on revised payroll tax returns for as long as the three-year statute of limitations is still in effect.

The employee retention credit against applicable employment taxes and qualified salaries provided to their employees through December 31, 2021, is therefore still available to eligible firms through the end of 2024.

Do owner’s wages qualify for ERTC?

Unfortunately, owners’ wages don’t usually qualify for the ERTC tax credit. 

This is due to the fact that most owners are paid from the business’s earnings rather than payroll; therefore, they are not eligible for ERC credit. 

The owners eligible for ERCs include those who own less than 50% of the business and those who control more than 50% of the business but not all of the owners must be members of the same immediate family.

The majority shareholders of S-corporations and C-corporations will not be eligible for Employee Retention Credits, according to IRS Notice 2021-49, published on August 4, 2021. 

Although the Employee Retention Credit was brought about to aid businesses experiencing problems caused by the pandemic, they do not apply to the earnings of majority owners or certain family members. 

It is important to note that neither your earnings nor those of a family member who is a 50% or more owner of your business is eligible.

How is the ERTC credit paid?

Starting with the second quarter, eligible companies must declare their total qualifying salaries. 

and the associated health insurance expenditures on their quarterly employment tax returns, which for most businesses will be Form 941. 

Payment often arrives 30-45 days following notice. 

The time needed to process and receive payment appears to vary significantly. 

In fact, with the current backlog, a business can have to wait up to 6 months or more. 

This can take even longer if a professional wasn’t used and the filing was done incorrectly, not to mention the possibility of an audit.

In some cases, the service center where you file, the magnitude of the return, etc., might play a role. 

You only need to answer as soon as any requests for information are made if you submitted electronically and were given an acknowledgment. 

The IRS is clearing the backlog, and processing is apparently improving. 

However, be wary; if you submitted 8–10 months ago and haven’t heard anything, it’s time to double-check.

Is ERTC refund taxable?

Employee Retention Credit pay reduction results in earnings equal to the credit amount, even if the refund is not taxable under IRC 280C. 

If you have already received the refund, your 2021 tax return still shows a credit for 2021 since this decrease occurs in the year the earnings are paid. 

You cannot change wages on your 2022 tax return if you didn’t claim ERC for the 2020 or 2021 quarters and are now doing so.

Let’s say that a worker qualifies for the Employee Retention Credit. Then, regardless of whether it reports and pays its federal employment taxes via a third-party payer, it is entitled to it.

The credit’s refundable portion and the portion that lowers the applicable employment taxes paid by the employer are not counted in the employer’s gross income.

 Partnerships must submit a revised administrative adjustment request. For years when they are making pay adjustments and seeking credits, businesses must file modified income tax returns.

How does ERTC affect tax returns?

Employer tax credits (ERC or ERTC) are not regarded as taxable income, but under IRC Section 280C, they result in a decrease in pay equal to the credit’s amount. 

This decrease happens in the year that the wages were paid. Therefore, even if the refund hasn’t arrived yet, a 2021 credit must be included on the 2021 tax return. 

On their federal employment tax returns, employers can claim the Employee Retention Credit. Typically, this is Form 941, Quarterly Federal Tax Return. 

If you didn’t claim the ERC and find out afterward that you were eligible, you could amend your Form 941 with Form 941 x. 

You can petition the IRS to give you your refund early if your credit is more than the taxes you owe. 

Businesses with 500 or fewer full-time employees as of 2019 are covered under this clause. 

To ask for the advance, use Form 7200. Before the end of the month following the quarter in which you paid the qualifying wages, you must submit Form 7200.

Can you receive ERTC and PPP?

Companies with W-2-paid employees suffering from the epidemic are eligible for this tax credit. The Relief Act, passed in December 2020, allowed companies to retrospectively apply for ERTC money, even if they had already obtained a PPP loan.

The PPP loans were given out to help small American companies cope with the COVID-19 outbreak. This program received more funding than any other relief program in the CARES Act. To assist companies in keeping their staff on the payroll, the ERTC program was established at the same time. It is a tax credit that reduces the 6.2% FICA tax that firms must pay for their workers. 

Companies with W-2-paid employees suffering from the epidemic are eligible for this tax credit. Self-employed persons and business owners might use PPP loans to pay themselves or other connected people on the payroll.

The Relief Act, passed in December 2020, allowed companies to retrospectively apply for ERTC money, even if they had already obtained a PPP loan. The Act expanded the pool of possible claimants. However, as the tax credit only covers the employer’s share of FICA, self-employed people or organizations with no payroll tax burden are not eligible to use it.

How does a PPP loan affect ERTC credit?

Some elements set the PPP and ERC apart. To assess eligibility and which program will benefit your business the best, you must consider each separately and in comparison to one another. The IRS confirms that an employer’s payroll expenses reported on a PPP application for forgiveness in 2020 are not qualified expenses for ERC.

A company that obtained a PPP loan was initially ineligible for the ERC. However, a business that obtained a PPP loan may also apply for the ERC retrospectively back to 2020 thanks to the Consolidated Appropriations Act of 2021.

The restriction is that you cannot calculate your ERC amount using the wages that make you eligible for PPP debt forgiveness. Documentation demonstrating that you are not “double dipping” and using both programs to pay the same salary is required.

Consider a scenario in which you paid $100,000 in salary with PPP money and anticipate being eligible for forgiveness. In this case, it is not possible to determine your ERC using the salaries that have been forgiven.

Does PPP count as gross receipts for ERTC?

It is important to understand the ERC and PPP interaction when it comes to calculating the refundable tax credit for determining ERC eligibility.

The term “gross revenues,” as used in section 448(c) rules, refers to the entire revenue for the taxable year, which typically includes all sales (net of refunds and allowances) and all payments paid for services. 

According to the Internal Revenue Code IRC, amounts that can be excluded in calculated gross receipts are:

• The forgiveness of Paycheck Protection Program (PPP) loans;
• Shuttered Venue Operators Grants under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, part of the Consolidated Appropriations Act, 2021, P.L. 116-260;
• Restaurant Revitalization Fund grants under the American Rescue Plan Act

With that being said, PPP loan forgiveness is not included as federal taxable income. 

Under IRC Section 448(c) and associated rules, they may be considered gross earnings. 

Employers may, as long as the safe harbor is used consistently, deduct the amount of PPP forgiveness from gross sales when assessing eligibility to claim the ERC for a specific calendar quarter.

Please be aware that the PPP loans, SVOG funding, and RRF grants are the only three COVID assistance programs to which the gross receipts exclusion applies. 

The various relief bills featured a number of financial aid programs, but not all of these funds are exempt from gross income for purposes of determining ERC eligibility.

In order to determine whether an organization qualifies for the Employee Retention Credit based on a drop in gross receipts, the IRS provided a safe harbor that permits an employer to omit specific amounts received through other coronavirus economic assistance programs.

While an employer could qualify for the ERC if its gross receipts for a calendar quarter fall by a specific percentage compared to a prior quarter, how gross receipts are calculated is crucial. A company’s total income is already reduced by the sums collected from the other coronavirus alleviation initiatives mentioned above. Unless the safe harbor is applied, they must be counted among its gross receipts.

Even though the ERTC expired on October 1, 2021, firms can still submit a Form 941-X request for a retroactive ERTC refund. This form may be utilized to adjust employment taxes within three years of the first return or two years after the employer’s tax payment date.

Therefore, depending on when they initially filed or paid their company taxes, qualified firms who did not initially claim their ERTC may still be able to do so through 2024. Even though the ERTC is no longer available, eligible employers can still apply for the credit by updating their filings for their 2020 or 2021 taxes. The credit is valid for earnings earned or paid between March 13, 2020, and December 31, 2021.

Employees’ eligible pay may include the cost of employer-provided health benefits. The ERTC is open to organizations of up to 500 W-2 employees. Employers should know that this retroactive reimbursement is only available for the tax years 2020 and the first three quarters of 2021; the qualifying requirements do not apply for the fourth quarter of 2021 or the tax years 2022 and beyond.

Can I still get the ERTC 2020?

Even though the ERTC expired on at the end of 2021, firms can still claim the ERTC 2020 by submitting a Form 941-X request for a retroactive ERTC refund for qualified wages paid from the federal government. 

This is available within three years of the first return for employee wages paid or two years after the employer’s tax payment date, this form may be utilized to adjust employment taxes. 

Therefore, depending on when they initially filed or paid their company payroll taxes, qualified firms who did not initially claim their ERTC may still get refundable payroll tax credits through 2024. 

Even though the ERTC is no longer available, qualified employers can still apply for the credit by updating their total qualified wages for their 2020 or 2021 taxes. 

The employee retention tax credit is valid for earnings earned or wages paid between March 13, 2020, and December 31, 2021. 

Employees’ eligible pay may include the cost of eligible employer related health care costs. Organizations with up to 500 W-2 employees can claim the ERTC. 

Employers should know that this retroactive reimbursement is only available for the tax years 2020 and the first three quarters of 2021; the qualifying requirements do not apply for the fourth quarter of 2021 or the tax years 2022 and beyond. 

The IRS is looking at possible extensions beyond 2024, but there is also the possibility that the program could be cut short.

If you are interested in taking advantage of this tax credit, we recommend that you take advantage of it as soon as possible.

Can I still apply for the employee retention credit in 2022?

If your company qualifies, you can still benefit from the employee retention tax credits despite their deadline of October 1, 2021. You could apply for a retroactive ERTC refund if you didn’t previously submit a claim for the credit. An Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, Form 941-X, must be filed to file retroactively. Three years have passed since the date of your initial filing.

Although the ERTC is an excellent tool for helping struggling businesses lower their tax burden, utilizing it is still a little challenging. If your business qualifies, you should contact your accountant and payroll preparer.

Your accountant and payroll provider may both assist you in figuring out how much your credit is worth and the amount of tax that needs to be paid to the federal government because the credit size relies on how much you typically pay in Social Security taxes. A financial expert can also prevent the application of the same paycheck for both the ERTC and the PPP debt forgiveness.

Do I qualify for ERC credit?

Eligibility depends on 2019 records. Businesses in 2019 with 500 or fewer employees may be eligible. To qualify, gross receipts in 2020 or 2021 must be at least 20% lower each quarter than the corresponding quarter in 2019.

A 100% employee wage credit may be available to businesses with 100 or fewer full-time employees. This is true regardless of whether the company usually operates or is under a shutdown order. If a company pays employee wages even though it cannot provide services owing to COVID-19 conditions, it qualifies if it has more than 100 employees. To be eligible, a company must operate in the private sector or be a tax-exempt organization that will be active in 2020 or 2021.

Government restrictions on trade during COVID-19 resulted in a full or partial suspension of activities and gross revenues that were at least 50% lower than those of the corresponding calendar quarter in 2019; a “recovery startup” with annual gross sales of $1 million or less and an ERC ceiling of $50,000, which launches after February 15, 2020. You can apply for the credit in 2022 if your company recovered from a sizable drop in gross receipts, but you did not do so at the time. To establish eligibility, businesses must look back at salaries paid after March 12, 2020, three years after the program expires.

Employers have a safe harbor according to Revenue Procedure 2021-33, which the IRS released on August 10, 2021. Employers may now omit the number of grants from the Restaurant Revitalization Fund, grants to operators of shuttered venues, and cancellation of PPO loans.

Can I still apply for the employee retention credit?

Yes. On April 15, 2024, the statute of limitations for the 2020 ERC expires. The 2021 ERCs’ statute of limitations doesn’t expire until April 15, 2025. The ERC is still available to recover starting businesses for wages paid after June 30, 2021, but before January 1, 2022.

Before completing the necessary adjusted employment tax return and submitting it by the due date, you can also claim the ERC for earlier quarters. Despite the original deadline for the program being moved back on October 2, 2021, small firms can still apply for the Employee Retention Tax Credit (ERC).

You can apply for the credit in 2022 if your company recovered from a sizable drop in gross receipts, but you did not do so at the time. To establish eligibility, businesses must look back at salaries paid after March 12, 2020, three years after the program expires.

How long does it take to get ERTC funds?

Previously, the IRS anticipated issuing refunds anywhere from six weeks to six months after the amended payroll reports were submitted. A refund turnaround time of nine to twelve months is to be anticipated. In general, it’s crucial to avoid waiting too long beyond the due date of your return or filing an extension if you’re expecting a refund.

After either of these dates, the IRS has three years to audit your return. If you are audited and win, getting your money back may take more than three years. After the conclusion of your tax year, you, as a business owner, have just ten years to audit your return and make you pay back taxes, interest, and penalties. Since more considerable funds (more than $1 million) need to be scrutinized further, employers might take even longer to receive them.

The IRS is taking measures to hasten the procedure. For instance, tax returns are being sent from IRS locations behind schedule to others with more staff available. The IRS processes return in the order that they are received. The IRS supplied a phone number to call with inquiries to ask any questions about reimbursements. To reach them, dial (877) 777-4778.

What constitutes a partial suspension of operations?

According to the IRS, a business is considered to be partially shut down when more than a small percentage of its business activities are halted by governmental order. In two situations, a component of an employer’s business activities shall be judged to comprise more than a minimal percentage of its business operations solely for this employee retention credit.

These are if; the gross revenue from those operations accounts for at least 10% of the total revenue (both calculated using the revenue for the same calendar quarter in 2019) or the number of hours worked by those employees in those operations accounts for at least 10% of the total number of hours worked by all employees in the employer’s business. These are determined by considering the number of hours of service performed by employees during the same 2019 calendar quarter.

Many companies have several locations. The employer is seen as partially shut down when one or more locations are deemed totally or partially closed while others are open. For members of an aggregated group, the same is true. When more than one group member is suspended in whole or in part, the entire group is recognized as one employer for employment law purposes.

There are several instances under Notice 2021-20 where a firm is or is not regarded as fully or partially suspended. An employer may very well be eligible for the ERC for the duration of the enforcement when more than a minimal portion of their firm has been negatively damaged by a governmental closure order, either directly or indirectly.

I did not have a revenue reduction, am I disqualified?

Yes, unfortunately. Based on a considerable decrease in gross income, one qualification method is to prove a significant decline in gross receipts for the given period. To qualify, your company’s gross receipts in 2020 must decrease by 50% from the same quarter in 2019. Because you just needed a 20% decrease in gross receipts to pass the test in 2021, it will be significantly simpler to comply with this criteria.

The gross revenue criteria are satisfied for eligible wages paid in 2021 if an employer’s gross receipts for any calendar quarter in 2021 are less than 80% of its gross receipts for the same quarter in 2019. If the employer did not exist during any calendar quarter of 2019, then special restrictions apply.

For 2020 and 2021, the gross revenue test is changed. The gross revenue test examines whether the employer’s gross receipts significantly decreased from the relevant quarter in 2019 to any quarter in 2020 for eligible wages paid in 2020.

If a reduction in gross receipts in any quarter of 2020 is less than 50% of a comparable quarter in 2019, the decline is considered large enough to satisfy the ERC standards. The employer continues to be eligible once this cutoff point is reached until gross receipts exceeded 80% of its gross receipts for the same calendar quarter in 2019.

I received a PPP loan, am I disqualified?

Even if you were given funds under the PPP program, you are still eligible for this credit. It should be emphasized that ERC does not apply to payroll funded by a PPP loan. If you are qualified for the ERC and payroll was not covered by a PPP loan, you may compute the ERC based on the unpaid wages.

You can only go forward and apply for a PPP loan in 2021; you cannot apply for one in 2020. However, if you are eligible for the ERC, you may claim it on earnings received in 2020. You will have a 24-week window to repay a PPP loan if you obtain one prospectively.

If granted a PPP loan, you will have 24 weeks to put the money to use. To maximize the ERC credit between quarters, you must consider distributing PPP loan funds throughout the weeks. A federal financing program called the PPP had $350 billion initially set out for small companies affected by the COVID-19 epidemic. Federally insured loans with low-interest rates were made available to qualified firms to help with cash flow for eight weeks.

Any company that had to shut down entirely or temporarily due to a government order may be eligible for the coronavirus help. The Small Business Administration (SBA) provided backing for the loans, some of which were forgiving, meaning some borrowers did not have to repay them.

There are significant distinctions between the PPP and ERC, even though both are components of federally supported initiatives to assist small firms in dealing with lost revenue brought on by COVID-19. For instance, the PPP has a restricted budget. With the ERC, this is not the case; any eligible firm that submits an application will receive the tax credit.

Does The ERC Apply to Nonprofits?

For the ERC, tax-exempt organizations that had their activities wholly or partially halted due to directives from the proper governmental body restricting trade, travel, or group gatherings because of COVID-19 are frequently considered qualifying employers. Wages paid for the whole period the regulations were in force may be eligible. Even if it’s not the only way to qualify, it might be a significant factor for some groups if the government restricts group gatherings.

The maximum credit allowed under the ERC at the time it was initially implemented as a part of the Coronavirus Aid, Relief and Economic Security (CARES) Act in 2020 was $5,000 per employee. The maximum credit rose by an extra $21,000 due to its renewal and extension last year under the Coronavirus Response and Consolidated Appropriations Act.

Nonprofit organizations are still permitted to file their payroll tax filings for the covered months, even though last year’s Infrastructure Investment and Jobs Act accelerated the ERC’s expiration date and, as a result, essentially repealed the program for the fourth quarter of 2021. Employers could take the money out of their quarterly payroll taxes if they submitted their payroll taxes in 2020.

What is the Employee Retention Tax Credit (ERTC), and how is it different from the Payroll Protection Program (PPP)?

A firm receives a forgiving loan under the PPP. The loan is not needed to be repaid if they abide by its conditions, which include using the money for rent or payroll. ERC is a tax credit. It is not returned and is made payable to the firm via a cheque from the IRS.

The PPP and the ERTC are the recovery alternatives offered to company owners. Many companies choose not to use the ERTC since the PPP debt can be forgiven. Small companies are eligible to benefit from both programs for 2020 and 2021 according to the Consolidated Appropriations Act (CAA), which was approved in December 2020. As a result, companies that have already requested a PPP loan may also request an ERTC. By raising the credit amount granted to employers, the CAA also enlarged the PPP for round 2 and the ERTC.

The ERTC’s fourth-quarter eligibility for 2021 was terminated by the Infrastructure Investment and Jobs Act, which was approved on November 15, 2021. Only 2020 and the first three-quarters of 2021 qualify for the ERTC.

Applying for a PPP loan for a business is free of charge upfront. The sole expense arises if you don’t use the loan entirely by the loan terms. For ERC, there are no fees. It’s a write-off you claim on your quarterly tax return. The only cost would be if you used a service to file your tax returns.

Employers receiving PPP loans may be eligible for ERC under the Consolidated Appropriations Act. Application for each program must be made using a different salary. The IRS confirms that an employer’s payroll expenses reported on a PPP application for forgiveness in 2020 are not qualified expenses for ERC.

I got PPP funds already. Can I also get ERTC?

A PPP loan recipient employer may be eligible for ERC benefits under the Consolidated Appropriations Act, but a separate earnings set has to be used. Payroll expenses recorded by a firm for forgiveness in 2020 are expressly excluded from ERC relief, according to the IRS. Only under the following circumstances is the ERC Tax Credit granted:

• A person who belongs to a group that isn’t eligible for PPP submitted an ERC claim.
• The PPP loan does not cover the cost of the qualifying wages paid to the employer.

The forgiveness does not apply to earnings that are the same as the qualifying ERC wages when an employer obtains qualified wages from a debt that has been forgiven.

The Consolidated Appropriations Act of 2021 allows your company to continue to be eligible for the ERC while still receiving loan forgiveness under the PPP. This is because the earnings used to evaluate your eligibility for the two programs differ. However, to maximize the total benefit while preventing “double-dipping,” you must establish a thoughtful strategy that considers your company’s unique needs and circumstances.

How to apply for ERTC tax credits?

To be eligible for the ERTC, businesses must submit their total qualifying earnings and the associated health insurance expenditures every quarter (Form 941 for most employers). The employer’s portion of the Social Security tax will be deducted from this refundable credit.

Employers may choose to keep the value of employment taxes up to the ERTC amount rather than deposit it before getting the credit without incurring any fees. 

Employers who qualify and have less than 500 full-time employees may also ask for ERTC advance payment using IRS Form 7200. Employers with more than 500 workers can’t acquire an advanceable ERTC.

Form 941-X. This form may be utilized to adjust employment taxes within three years of the first return or two years after the employer’s tax payment date. Therefore, depending on when they initially filed or paid their company taxes, qualified firms who did not initially claim their ERTC may still be able to do so through 2024. Employers should be aware that only the 2020 and the first three quarters of the 2021 tax year are eligible for this retroactive reimbursement.

My revenue in Q1 2021 is back to pre-pandemic levels – so I must be ineligible – right?

Even if you think that your revenue is returning to normal, there are a few things you should consider before submitting this ERTC evaluation. First, you could have qualified in 2020 and retrospectively claimed those credits even if revenues returned to “normal” in 2021. The qualifying requirements for 2020 were based on income decreases from 2019 or whether your firm had to close entirely or partially due to a legislative condition.

Second, remember that we are comparing your Q1 2021 to Q1 2019, even though your revenue may have recovered to “normal” in Q1 2021. If your company saw growth in 2019, Q1 2020 revenue levels may have been much lower than in 2019.

Additionally, you can qualify for Q1 2021 if your revenues in Q4 2020 were just 20% lower than in Q4 2019. Few advisers are aware of a safe harbor clause, which implies that many organizations will be eligible for $7,000 per employee in Q1 2021. This is so that you can keep Americans employed and money pouring into our economy as we rebuild larger and stronger than before.

I thought payroll taxes deferred in 2020 had to be repaid. Does ERTC work the same way?

The CARES Act permitted self-employed people to postpone their equal parts of self-employment taxes that would have been payable between March 27, 2020, and December 31, 2020, and employers to defer the deposit and payment of the employer’s portion of Social Security taxes. The deadline for depositing the first 50% (or more) of the sum deferred under the CARES Act is December 31, 2021, although this day is a holiday. Therefore, the IRS said that payments paid by January 3, 2022, will be regarded as timely.

The CARES Act’s provision that permitted employers to postpone the deposit and payment of the employer’s part of Social Security taxes still stands. Once those deferrals have been reimbursed, at least half of the remaining debt must be paid by 12/31/21. Then, those deferrals must be paid back, with at least half of the total amount due before December 31 and the remaining amount payable on December 31.

However, it is essential to note that credits for ERTC are not considered deferral. They are full refunds of the salary you have already paid. You haven’t paid taxes; you’ve paid wages. You can decide whether you want a refund cheque or an offset against future tax contributions.

Why isn’t my bank (or my CPA) talking about this?

Because they were essentially committing you to an SBA-guaranteed loan, your banker or CPA was probably quite helpful when it came to collecting your PPP money. The SBA encouraged the bank to inform you about the program and organize all your documentation by paying the bank administrative fees depending on the PPP loans they made.

The PPP program was a very straightforward computation compared to the ERTC. 2 ½ times your typical monthly salary, with health insurance and state unemployment taxes included. Because it is a burden and beyond the scope of their services, compliance with employment tax laws is not something that bankers are interested in becoming involved in.

What about my payroll service provider? Shouldn’t they be on top of this?

You must have access to your P&L and PPP program to calculate your ERTC credits. You may probably guess why Payroll Services are not providing to handle all of this for you, given the complicated eligibility rules, assigning ERTC credits at the employee level while accounting for yearly and quarterly qualifying pay disparities, and other factors.

Because the Payroll Service cannot be held accountable for the accuracy of the ERTC credits you claim, most Payroll Services require clients to sign an indemnity release before filing a Form 941-X.

The final stage in the process, filing your 941-X amended forms, is something most payroll service providers are eager to do. Most payroll service providers don’t provide their clients the service of figuring out their eligibility and optimizing their credit. We collaborate with all the primary payroll service providers to have this credit lodged. Payroll service providers are not interested in devoting time and money to ERTC, a one-time specialized filing service. Such systems comprise ADP, Paychex, Paycom, and others.

Will my tax CPA handle this since they handle my income tax returns?

Unlike a federal tax, employment taxes offset ERTC credits on Form 941 and cash advances on Form 7200. Every tax accountant we spoke to claimed they focused on remaining current on the constantly changing income tax legislation and couldn’t suddenly become specialists in the ERTC program. The intricacy of the ERTC program is a beast unto itself.

You should delegate this work to your tax accountant if they can assess your eligibility by quarter and year, compute your credits, and file the extensive paperwork to support an IRS audit.

My bookkeeper has my info. Can they handle my ERTC claims?

While it is suitable for a bookkeeper to have your records, including information on your ERTC status and claim, there’s too much to do for a bookkeeper. ERTC claims aren’t that straightforward either, which means the filer must make accurate calculations and provide accurate information in the ERTC claim to get the funds their business requires.

Bookkeepers must be aware of the CARES ACT, Payroll and Healthcare Enhancement Act, Families First Act, Consolidated Appropriations Act, and the PPP Payroll Flexibility Act, amongst others, to claim ERTC correctly.

They must also be familiar with the various IRS laws, interpretations, and the bulletins posted by the Small Business Administration and are up to date with updates on all of these laws, rules, and regulations, which is a lot of information to grasp while you’re doing a full-time job bookkeeping for a business owner. This is why it is advised to hire professionals when filing for a PPP or ERTC claim to ensure that it is done correctly and so that your ERTC claim does not get rejected. 

If I’m a large employer, is it worth still claiming the ERC?

A company must demonstrate either a substantial drop in gross receipts or wholly or partially halted activities to be recognized as an eligible employer. I’m done now! If one of those requirements is satisfied, the employer qualifies for the ERC, and the number of employees affects how much in qualifying earnings the firm can take into account when figuring up the credit.

When calculating the maximum amount of qualifying wages for 2021, an eligible employer with an average of 500 or fewer full-time employees in 2019 may include ANY earnings (regardless of whether the employee rendered services to the firm or not). 

An employer, however, can only assess wages paid to employees for not performing services if they had an average of more than 500 full-time workers in 2019. This remark may sometimes put off large employers, but a closer examination is necessary. The employer’s payment to qualifying health plan expenditures is included in qualified earnings, so keep that in mind.

As a result, for large employers, qualified health plan costs paid by the employer for furloughed workers would be considered a suitable wage. The earnings given to those who weren’t working full-time may also be considered. Consider the scenario where you continue to pay someone their full wage even though they only put in 25 hours each week. The pay for the 15 hours of “non-working” each week might be regarded as a qualifying salary for a higher position.

ERTC Assistance

We hope these FAQ’s helped you in obtaining the Employee Retention credit. If there is anything we can do don’t hesitate to get in touch with us and we will help you the best way we can. The easiest way it through our contact form or call us at (360) 641-7709.