There is less than a week until April 18, the IRS tax deadline for most small businesses, and many small business owners aren’t even aware of the employee retention tax credit lest taking advantage of it.
The ERTC was first created by the Coronavirus Aid, Relief, and Economic Security Act in March 2020 to provide financial relief to businesses whose operations were impacted by the COVID-19 pandemic. It has since been amended, extended, expanded, limited and most recently retroactively ended by the Infrastructure Investment and Jobs Act. However, qualified small businesses can still claim this credit on their 2021 tax returns.
Here’s what you need to know about the ERTC as you rush to file your 2021 tax returns.
The basics
What’s ERTC? It’s a fully refundable tax credit available to employers as a percentage of the qualified wages paid to employees in 2020/21 during the COVID-19 pandemic.
What’s the eligibility? The IRS outlines three ways to qualify for the ERTC:
• Full or partial suspension of business operations during 2020 or 2021.
• Significant decline in gross receipts — 20% or more decline in revenue during 2021; 50% or more decline in 2020.
• Recovery startup businesses that started operations after February 15, 2020, with average gross receipts of $1 million or less.
What counts as qualified wages? Generally, qualified wages under ERTC are compensation paid to employees, including qualified health care costs. However, the definition of qualified wages also depends on the number of full-time employees an eligible employer had during 2019.
Businesses that weren’t in existence in 2019 should use the average number of full-time employees in 2020.
How does it work? This credit is now available to affected businesses at an increased rate of $7,000 per employee per quarter. However, with the latest infrastructure bill, ERTC is now limited to the third quarter of 2021, so any wages paid after Sept. 30, 2021, are ineligible for the credit. That means the maximum credit available now per employee is $21,000 for the calendar year.
Impact of other credit and relief provisions on ERTC
The federal government came up with a number of programs and credits to support businesses recover financially from the pandemic-induced downturn. But mostly they can’t be clubbed together to avail more benefits.
Here’s how ERTC is impacted by other credit and relief provisions offered:
• If you received a loan under Paycheck Protection Program, you may now be eligible for the ERTC too. If your application for loan forgiveness was approved, you cannot claim this credit for wages you paid with your PPP loan. However, in case your forgiveness request isn’t granted, you can use wages paid with your PPP loan to claim the ERTC.
• Though you can claim both the ERTC and the tax credit for providing paid leaves to your employees due to COVID-19, you cannot do so for the same wages. Besides, you can’t include the paid leave wages in your calculation of qualified wages for the ERTC, treat them separately.
• Wages counted for ERTC can’t be counted for the credit for Section 45S paid family and medical leave.
• If you are allowed a Work Opportunity Tax Credit, the employees won’t be counted for the ERTC.
How to claim ERTC in 2022
To claim the ERTC, you need to report the total qualified wages and the related health insurance costs for each quarter on your quarterly employment tax returns, which will be Form 941 (for most employers). For filing ERTC retroactively for the past quarters, you can use Form 941-X.
For any additional information on ERTC, you can explore the FAQ page of the IRS.
