Who Qualifies for the Employee Retention Tax Credit?

Who Qualifies for the Employee Retention Tax Credit

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 their operations to survive. This meant hundreds of unemployed individuals looking for work.

To prevent this disaster from becoming worse, the US government introduced the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Through this, Congress introduced the Employee Retention Tax Credit.

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What is ERTC?

The employee retention tax credit (ERTC) is a refundable board-based tax 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. Through this tax credit, eligible employers can get a refundable payroll tax credit equal to a percentage of qualified wages.

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.

Ultimately, President Biden signed the Infrastructure Investment and Jobs Act (IIJA) on Nov. 15, 2021, which retroactively eliminated the ability of most employers to claim an Employee Retention Credit (ERC) for wages paid after Sept. 30, 2021.

This article will give a brief overview of who qualifies for the employee retention tax credit, the application process, and what should be your next steps since ERTC is no longer available. Let’s get started!

Who Qualifies for the Employee Retention Tax Credit?

To determine which employers and businesses qualify for the ERTC, we need to look at the time period.

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.

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 or not.

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 Are Required For 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 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 in the number of employees in a room or building.

What Are The Qualified Wages?

To calculate the wages qualified for 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 who is 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.

Who Qualifies for the Employee Retention Tax Credit

Step-By-Step 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 the employee retention tax credit. Thus, work with an accountant or CPA and gather all basic business information, such as legal business name, legal address, number of employees, etc.

Payroll Info

After you have determined if your business has qualified, gather payroll information. You have to pay employees’ gross pay for each quarter of 2020 and 2021; thus, find out employees that had stayed or left, if left, when they stopped working.

PPP Loan Documents

If you have taken a PPP loan, you must gather all documents and information, such as the date and loan amount. 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. This includes name, address of job location, start, end of employment date, etc. A full-time employee works 30 hours a week.

Sales Revenue Information

To determine the ERTC amount, calculate:

  • Sales revenue information
  • Net income and loss
  • Number of full-time employees

Fill 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.

Are You Eligible For ERTC? Check Your Status Now!

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New Guidelines Regarding ERTC

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.

Thus, if your business falls under the category of small recovery business, sign up here, save on months of waiting, and get your refund in possibly less than 30 days. Skycutter Solutions helps you claim your ERTC tax credit in 5 simple steps.

You have to:

  • Fill the questionnaire
  • 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 15 minutes. So what are you waiting for? Sign up now!

FAQs

  1. Can you only claim the ERC for full-time employees?

Not necessarily. The average number of full-time employees in the calendar year 2020 and 2021 determines the amount of credit you can claim.

  1. How do I calculate the employee retention tax credit?

The maximum amount of qualified wages for any one employee per quarter is limited to $10,000, including qualified health plan expenses, with maximum credit for a quarter concerning any employee of $7,000. For 2021, the ERTC is equal to 70% of eligible wages.

  1. What are additional tax credits you can qualify for?

Whether you qualify for the ERC or not, if your employees availed sick leaves to take care of themselves or their family members during COVID-19 in 2020 and 2021, you can qualify for ERTC. There are some conditions, such as between April 1, 2020, to September 30, 2021, when sick leave wages must be paid to the employees.

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