Businesses have been confused about who qualifies for the Employee Retention Tax Credit. There are several rules in place that can help determine eligibility for businesses. Follow the following rules and your business could recoup a good deal of money.
This article will briefly overview who qualifies for the Employee Retention Tax Credit, the application process, and your next steps in claiming your tax credits, so let’s get started!
How Does the Employee Retention Tax Credit Work
The COVID-19 pandemic wreaked havoc on the world, and we are still reeling from the aftershocks. The economy went down, businesses went bankrupt, and many had to shut down their operations to survive. This meant hundreds of unemployed individuals looking for work.
The US government introduced the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to prevent this disaster from worsening. Through this, Congress introduced the Employee Retention Tax Credit.
The Employee Retention Tax Credit (ERTC) is a refundable credit made with the intention of encouraging employers to keep employees on payroll while navigating the harsh economic conditions set by the COVID-19 pandemic.
Eligible employers can get a refundable payroll tax credit equal to a percentage of qualified wages based on previous tax filings through this tax credit.
The original ERTC was valid for eligible employers from March 13, 2020, to Dec. 31, 2020, but it was modified several times and extended to Sept. 30, 2021.
Moreover, initially, employers were not allowed to file for a PPP loan along with ERTC, thanks to the Consolidated Appropriations Act, the condition was modified, and eligible employers could now receive a PPP loan and claim for ERTC.
Who Qualifies for the Employee Retention Tax Credit?
To determine which employers and businesses qualify for the ERTC, we must look at the period.
ERTC Eligibility From March 13, 2020, to December 31, 2020:
During this period, the employers must have a trade or business or a tax-exempt organization that fulfilled the following criteria:
- If the employer experienced a calendar quarter in which they had to partially or entirely shut down their operations due to orders from an appropriate government authority, limiting travel, commerce, or group meetings due to the COVID-19 pandemic.
- If the employer experienced a significant decline in gross receipts of at least 50% in any calendar quarter in 2020 compared to the same calendar quarter of 2019.
- Self-employed individuals were not qualified for ERTC for their wages, but if they had employed other people, they could claim ERTC.
- Political subdivisions, government, and state entities were not eligible for the 2020 ERTC credit.
ERTC Eligibility From January 1, 2021, to September 30, 2021
During this period, the employers must have a trade or business or a tax-exempt organization that fulfilled the following criteria:
- The employer was partially or fully suspended from operations due to orders from an appropriate government authority.
- The employer experienced a significant decline in gross receipts of at least 20% in any calendar quarter in 2021 compared to the same calendar quarter in 2019.
- If the business was not eligible in 2019, it could use the gross receipts from the immediate previous quarter, i.e., 2020.
- Self-employed individuals were not qualified for ERTC for their wages, but if they had employed other people, they could claim ERTC.
- Political subdivisions, government, and state entities were not eligible for the 2021 ERTC credit, but tax-exempt colleges, universities, and hospitals were eligible.
The decline in gross receipts for both periods was eligible, regardless of whether the business was affected by the COVID-19 pandemic.
ERTC Eligibility From October 1, 2021, to December 31, 2021
During this period, most employers didn’t qualify for the ERTC because the Infrastructure Investment and Jobs Act limited the availability of the ERTC in the fourth quarter of 2021 to recovery startup businesses only.
Recovery startup businesses began trade or businesses after February 15, 2020, and had annual gross receipts that do not exceed $1 million. Moreover, the total credit is limited to $50,000 per calendar quarter.
Other Things That Can Affect ERTC Qualification
- Wages paid to certain relatives
- Limited capacity to operate
- Under the Families First Coronavirus Response Act (Phase II), the wages paid for sick and family leave.
- Supply chain distributions and time is taken away from shifts to clean and sanitize.
- Any wages, including paid family and medical leave.
- Reduction of services and goods offered to customers and operating hours.
- Disruption of sales force team.
- Inability to attend or disruption or cancelation of events due to COVID-19.
- Inability to work with vendors.
- Limitation on the number of employees in a room or building.
If you would like help with the Employee Retention Credit, contact FTCO ERC to get more information on how to claim your tax credits.
What Are The Qualified Wages Related to Employee Retention Credit
To calculate the wages qualified for the Employee Retention Tax Credit, you need to count the number of full-time employees you averaged in 2019. The number of employees determines if the employer is large or small, which will, in turn, define the eligible wages.
For 2020 ERTC, an eligible employer must have an average of 100 or fewer employees to be considered a small employer. In contrast, for the 2021 ERTC, an eligible employer must have an average of 500 or fewer employees to be considered a small employer.
For small employers, all wages and health benefits are included. Whereas, for large employers, wages and health insurance benefits paid to an employee not providing services due to the effects of the pandemic are included in qualified wages.
These wages are only considered when an employer is considered eligible.
Step-By-Step Guide to Complete the ERTC Application Process
To apply for the employee retention tax credit, follow the step-by-step application process below:
Basic Business Info
As mentioned above, not all businesses qualify for employee retention tax credit. So the first thing to do is gather all basic business information, such as legal business name, legal address, number of employees, etc.
Payroll Info
Gather the documentation of your payroll information. You have to pay employees’ gross pay for each quarter of 2020 and 2021. Find out your total number of W-2 employees for a given quarter. The IRS W-3 Form can help with this.
PPP Loan Documents
If you have taken a PPP loan, you must gather all documents and information, such as the date and loan amount. Also which PPP loans were taken and if they were forgiven. This will help determine the amount you can claim from ERTC. If you have not received a loan, you can skip this part.
Full-Time Employee Information
Next, gather information about full-time employees from 2019 to see which wages are eligible for ERTC. Part-time employees are also eligible but the criteria is a little different for them. A full-time employee works 30 hours a week.
Gross Receipts for Applicable Quarter and Comparison Quarter
To determine the ERTC amount, calculate the following:
- Sales revenue information
- Net income and loss
- Number of full-time employees
ERTC Forms
To claim the ERTC credit, you need to file the following forms:
- Form 941-x (Adjusted Employer’s Quarterly Federal Tax Return) to claim the credit retroactively.
- Form 941 (Employer’s Quarterly Federal Tax Return) to claim the credit currently.
- Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to claim the credit in advance
When claiming Employee Retention Tax Credit in advance, employers can either reduce their tax deposits with the IRS or ask for an advance. Advance payments are available to small businesses with less than 500 full-time employees, but with some limitations, such as the advance payment cannot exceed 70% of the quarterly average wages the employer paid in 2019. If the employer did not exist in 2019, they could use the average wages per quarter the employer paid in 2020.
New ERTC Guidelines
After the Infrastructure Investment and Jobs Act (IIJA), many employers did not qualify for the Employee Retention Credit, except for small recovery businesses. Thus, many businesses previously claiming credit did not receive an ERC for the fourth quarter of 2021.
Even small recovery businesses had to comply with all rules in Notice 2021-20, Notice 2021-23, and Notice 2021-49 addressing CARES Act provisions.
Although, you can still obtain the ERC for recovery startup businesses by amending your quarterly employment tax return for the appropriate quarters, provided you didn’t claim credit for all the qualified wages you paid between March 13, 2020, to Dec. 31st, 2021.
Getting Help From Federal Tax Credits ERC
If you are looking for assistance with this complicated process, we would like to offer our assistance. Our fulfillment process is broken down into a few steps to receive your ERC tax credits:
- Fill out the pre-qualification check
- We determine your eligibility
- Upload the required documents
- Calculate your credit
- File your payroll returns
- Receive your credit
This is a straightforward process and won’t take more than a few minutes. So what are you waiting for? Find Out if You Qualify Today!
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