What Is ERTC Eligibility, and How Do I Qualify?
Introduced in 2020, the Employee Retention Tax Credit (ERTC) was part of the Coronavirus Aid, Relief and Economic Security (CARES) Act. This credit was introduced to help businesses keep their employees on payroll during the COVID-19 pandemic, which effectively shut down the world. Congress passed the ERTC to prevent the irreparable financial loss and mass layoffs many companies worldwide faced during this time.
Since then, the ERTC guidelines have been revised and expanded, first in December 2020 by the Consolidated Appropriations Act (CAA) and then in March 2021 by the American Rescue Plan Act (ARPA) and the Infrastructure Bill in November 2021. These policies amended the eligibility criteria and extended the credit to October 1, 2021.
Despite expiring, small business owners still have the chance to claim the ERTC for their 2020 or 2021 payroll tax returns, provided it is within the statute of limitations. In the case of payroll tax returns, that is three years from the filing date.
Here, you will find all you need to know about this tax refund, the ERTC eligibility, and how a small business owner like yourself can potentially claim up to $26,000 per employee.
Are You Eligible For ERTC? Check Your Status Now!
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The ERTC has seen several changes through the CAA, ARPA, and the Infrastructure Bill. These amendments can make it confusing to grasp the eligibility requirements and just how much ERTC your business can get back.
In 2020, when the ERTC was first introduced, the policy required businesses to have lost more than 50% of their gross receipts in any quarter while paying wages, which included healthcare benefits. Qualifying businesses could get up to 50% of paid salary, with the maximum credit capped at $5,000 per employee per quarter paid until December 2021.
If your business employed less than 100 people, you had to pay all of them for that time. If you had more than 100, then only full-time employees count toward this credit.
Because the CARE Act defined the ERTC as financial relief option for businesses, any employer that received a PPP (Paycheck Protection Program) loan automatically became ineligible. This severely restricted the number of companies that could benefit from the credit.
By 2021, the ERTC policy saw multiple revisions. The eligibility pool was increased by changing the status of the ERTC so that businesses that received a PPP loan could also receive employment credit. Also, your business needed to show a 20% decrease in gross receipts, and you could get back 70% of paid wages. This change expanded the credit to $7,000 per employee per quarter, meaning you can potentially get back $21,000 per employee for the first three quarters of the year.
Additionally, Recovery Startup Businesses, which are companies that started after February 2020, have the chance to claim all paid wages for all four quarters of 2021. Other amendments allow you can elect a prior quarter for the next quarter and increase the employee limit to 500.
Is Your Business Eligible?
For your business to qualify for ERTC, it must meet two sets of guidelines. The first is as follows:
- Your business is a private entity, including non-profits
- Your business is not a government entity
- You are not a sole proprietor
- If you are self-employed, you have staff on payroll
It is easy enough to determine if your business meets the requirements listed above. However, determining if you fulfill one of the following criteria is quite challenging as it requires a thorough examination of all gross receipts per quarter:
- In 2020 or 2021, the local government mandates required your business to be fully or partially shut down during the COVID-19 pandemic. This excludes all businesses deemed essential.
- For the 2020 tax credit, your 2020 gross receipts decreased by 50% when compared to the same quarter of 2019
- For the 2021 tax credit, your 2021 gross receipts fell by 20% when compared to the same quarter of 2019
For the last two criteria, if your company was not in business in 2019, the corresponding 2020 quarter can be used to show a revenue reduction between 2020 and 2021 and still qualify your business for the ERTC.
If your business is classified as a Recovery Startup Business, then you are also eligible for ERTC, provided they follow the requirements given below:
- Your business started after February 15, 2020
- Your business entirely or partially shut down because of COVID-19.
- Gross receipts showed a decline.
- Gross receipts are less than $1 million.
Which Employees Count?
- If your business has employed 100 or less than 100 people on the payroll, they all count, even those who were not working during those quarters.
- If your business has more than 100 employees (but less than 500), then only the people who were employed full-time count, including those who were not working during the pandemic.
- If your business has more than 500 employees, only those full-time employees count who were not providing services during the pandemic.
While this seems relatively straightforward, it is essential to note that the ERTC revision to include businesses that received first and second draw PPP loans (under the Work Opportunity Tax Credit) had a two-fold effect. Firstly, it increased the number of eligible companies that could benefit, but it complicated which employees counted toward the tax credit.
This edit means that if you have taken the PPP loan, you cannot claim those employees’ wages in the ERTC that were counted for PPP for the same. This also holds the same in the case of the same the Family and Medical Leave Act (FMLA) under section 45s.
Based on the conditions given above, those businesses eligible for an ERTC can get back upwards of 70% of the paid qualified wages against the Social Security tax.
Qualified wages are calculated based on the size of the workforce.
- If your business has less than 500 employees, then qualified wages are paid to ALL full-time employees during a complete (or partial) shutdown or for the quarter when the gross receipts show a comparative decline.
- If your business has more than 500 employees, then qualified wages are those wages paid to the full-time employees who were not working during that quarter.
In either case, per 2021 quarter, the maximum qualified wages per employee is $10,000, effectively making the maximum available ERTC $7,000 per employee per quarter (that is 70% of $10,000).
For example, let’s say you own a small business with 20 employees, and, while paying all qualifying wages, saw gross receipts reduce by 20% in the second quarter (Q2) of 2021 compared to Q2 of 2019.
You can now claim $7,000 per employee for Q2 of 2021. If this decrease in gross receipts continues to Q3, you can also request ERTC for that quarter. Therefore, in total, you can potentially get $280,000 back for 2021.
To claim the ERTC on your quarterly tax returns, you have to report the total qualified wages and any relevant health insurance costs. Then the ERTC is taken against your Social Security tax share.
You have a few options as to when you received your credit. You can retain it instead of depositing it without extra charges, or you can even request an advanced payment if you have less than 500 full-time employees.
Even though the ERTC is expired (as of October 2021), you can still file retroactively. The employment tax can be adjusted provided they were filed within three years of its original date or two years from the date you paid the tax. This means that if you have not claimed the ERTC yet, you still have time until the end of 2024, depending on your originally filed (or paid) taxes.
Remember, you can only claim this credit during the 2020 tax year and the first three quarters of 2021. ERTC eligibility does not hold for the fourth quarter of 2021 or the 2022 tax year (and beyond).
You still have an opportunity to recover what you lost during the pandemic. While the idea of getting money back sounds promising, as mentioned in the sections above, your business needs to meet numerous requirements and perform adequate accounting to determine, firstly, ERTC eligibility, and secondly, the size of the ERTC.
Trying to do it all yourself becomes a monumental task, especially while running your business simultaneously. You may end up miscalculating and file a claim less than your potential maximum amount, or, in the worst-case scenario, make an error that can result in your request being denied.
A done-for-you service can ensure your ERTC request is not denied and help you reap the maximum benefit. It is our job to keep track of all complexities and amendments to the ERTC and determine your business’s eligibility.
Once your eligibility has been established, we will meticulously review your quarterly employment tax returns and gross receipts to calculate each employee’s qualified wages and account for all relevant costs. We ensure you make the maximum claim to help get your business back on track and out of the red. All you have to do is fill out our intake form and leave the rest to us.
Are You Eligible For ERTC? Check Your Status Now!
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my son was playing and acidentally started ertc claim theres no business or anything i have no taxable income do i need to fill anything out or just forget it
If you have any W2 employees then it could be worthwhile to have a look.