In 2020, Congress established the Employee Retention Tax Credit (ERTC) to incentivize businesses and non-profits to keep their employees on their payroll.  Qualifying businesses and non-profits can receive a tax credit of up to $26,000 per W-2 employee.

 

Employee Retention Tax Credit (ERTC)

There are many nuances to confirming that a business or non-profit qualifies for the ERTC tax credit/refund and multiple nuances to calculating the ERTC tax credit/refund. 

 

There are two ways that a non-startup business can qualify for the ERTC program: the Gross Receipts Test and the Government Order test. 

 

To qualify under the Gross Receipts Test, a business must have had a sufficient drop in revenue between quarters in 2019 and the same quarter in 2020 and 2021. 

 

To qualify under the Government Order Test looks at the impact or "disruption" on the business operations resulting from government orders (a federal, state, county, health department, or city COVID mandate).

 

Examples of impacts on the operations of the business include the following:

 

• Limitations on the number of employees or guests allowed in the factory, warehouse, showroom, offices, lobby, etc. of the business 

• Supply chain interruptions- Critical goods were not available to the business due to a full or partial shutdown

• The requirement to shift hours to sanitize the business facility

• Inability to access equipment

• Limited capacity to operate

• Limited ability to work with vendors, or as a vendor

• Reduction in services or goods offered to customers

• Inability to travel: To meet with clients or potential clients

• Restrictions on group meetings

• Required decreases or changes in hours of operation

• Challenges finding and retaining employees

• Cancelled in-person marketing events, including trade shows, home shows, golf events or non-profit galas

• Mandatory business shutdowns

• One aspect of a business closed down:  For example, in the restaurant industry, if in-person dining was suspended but takeout was allowed.  Or an essential medical organization that was allowed to remain open but could not perform elective surgeries

• Businesses that operated in multiple locations; when one or more locations were fully or partially shut down while other locations were open
  
   

Employee Retention Credit

The maximum retention credit for each employee for 2020 was $5,000. For 2021, it was $7,000 per employee for the first three quarters and $21,000 for the fourth quarter. A business can refund the tax credit for up to $26,000 for each employee.

To qualify, the business must demonstrate it experienced a total or partial shutdown during the pandemic. It includes the inability to travel and other commercial constraints. They must also show evidence of gross receipt reduction.

 

Eligibility for the ERC

Businesses that had to stop operations, whether partial or complete, due to government limitations may be eligible for the credit. A firm that lost 50% of its gross receipts or had to cut back on operating hours can be eligible.

Eligibility depends on the period during which the business was interrupted. Qualified wages are those paid to the employee between March 2020 and January 2021. All wages qualify for compensation, including salary, health insurance, and other costs. All firms can use the ERC, regardless of sector or size.

 

How to Claim the ERC

Businesses can claim retention credits by lowering their business employment tax payments. You do this before filing your quarterly employment tax. Certain employers can use IRS Form 7200 to ask for advance credit. 

Where ERTC exceeds the overall tax liability, the excess amount returns to the employer. You should include all eligible expenses on Payment Protection Program loan forgiveness forms. It helps maximize acceptable wages for ERC. 

 

Benefits of Taking ERC

Small and medium-sized firms can benefit from the credit by amending their tax returns. The credit allows small businesses to avoid paying a huge payroll tax. It provides more cash to keep the business afloat. 

Companies are now using tax credits to meet increased demand. You can use the ERC alongside the Payment Protection Program (PPP) loan. The ERTC program expired in November 2021 when the Infrastructure Investment and Jobs Act was signed. It limits ERC claims to wages before October 2021. 

However, businesses can still claim ERC retroactively for three years by making amendments to their 2020 or 2021 tax returns. It means firms can still claim credits for the consequences of the pandemic until 2024. You should consult a tax accountant or payroll specialist for up-to-date information. 

 

When is the ERTC over? 

Businesses and non-profits can claim their ERTC credit retroactively for three years by making amendments to their 2020 or 2021 941 tax returns. You should consult a tax accountant or payroll specialist for up-to-date information. 

For more on the Employee Retention Tax Credit (ERTC) and how it can benefit your business, contact Coomber Consulting, LLC at ERTCInfo@Coomber.com or call (760) 205-3810 to schedule an appointment today.