Employee Retention Credit: A Quick Breakdown for Employers

 
Employees working together in a conference room

Although the Employee Retention Credit (ERC) has been around for over three years, many business owners are still unaware of it or how to claim it—and since the deadline to claim the credit for wages paid in 2020 ends next April, now is the time to get on top of this tax credit!

Employers should understand this benefit, also called the Employee Retention Tax Credit or ERTC, and how to take advantage of it while they still can. After all, it was established to help small and medium business owners like you retain quality employees, build your team, and continue business operations.

Launched in 2020 as a response to the COVID-19 pandemic, the ERTC has undergone changes yearly. These adjustments can confuse business owners attempting to determine their eligibility and potential refund amounts.

We're breaking it down below to help you understand and leverage this tax credit.

What is the Employee Retention Credit?

The IRS initially offered the ERTC as part of the CARES Act to help businesses and tax-exempt organizations retain employees during the COVID-19 pandemic. It is a refundable tax credit employers can claim on qualified wages and some health insurance costs.

Since it is a tax credit based on payroll taxes you previously paid, you don’t have to pay back the funds you receive.

2020 Employee Retention Credit

The ERC was first available to qualified small to medium-sized employers, including trade, business, and tax-exempt organizations. They can receive 50% of qualified wages (up to $10,000 per employee for the year), paid between March 13 and December 31, 2020, with a credit maximum of up to $5,000 per employee.

2021 Employee Retention Credit

The Consolidated Appropriations Act amended the ERTC to include:

  • Paycheck Protection Program (PPP) loan recipients

  • Colleges/universities with the main purpose of providing medical care 

  • 501(c)(1) organizations

All eligible employers can claim the ERTC against 70% of qualified wages ($10,000 per employee per quarter) paid between January 1 and June 30, 2021. This means they can receive a maximum credit of up to $7,000 per employee per quarter or $28,000 for the year.

The American Rescue Plan Act then amended the program to make the ERTC available to recovery startup businesses, which could now claim the credit for the Q3 and Q4 of 2021. This allows them to claim the credit against wages paid through December 31, 2021. While the eligible wage and maximum credit amounts stayed the same, recovery startup businesses are capped at a $50,000 credit per quarter.

Employee Retention Credit Eligibility

The ERTC is available to small to medium-sized businesses that paid W-2 employee wages after March 12, 2020, and before January 1, 2022. The IRS defines eligible business size as:

  • For 2020: Employing an average of 100 or fewer full-time monthly employees in 2019

  • For 2021: Including those that employed an average of 500 or fewer full-time monthly employees in 2019

While the program has ended and wages are no longer eligible for the ERTC, those who employed W-2 employees during the 2020 and 2021 tax years can file retroactive claims by the following deadlines:

  • April 15, 2024, for eligible quarters in 2020 (Q2, Q3, and Q4)

  • April 15, 2025, for eligible quarters in 2021

In addition to proving that they paid qualified wages to claim the credit, employers must show that they:

  • Had to shut down due to government orders during the COVID-19 pandemic in 2020 or the first three quarters of 2021, or

  • Experienced a significant decline in gross receipts during the eligibility periods in 2020 or the first three quarters of 2021, or

  • Qualified as a recovery startup business for the third or fourth quarters of 2021

Browse the full ERTC details and qualification requirements from the IRS.

How to Apply for the Employee Retention Credit

To claim the ERTC, you must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the eligible quarters in which you paid qualified wages. 

Remember, even if you received a PPP loan, you could still claim the ERC for qualified employee wages if you meet the above requirements. Your tax professional can help determine which wages are eligible for the tax credit. This primarily depends on how the qualified wages were reflected on your PPP loan forgiveness application.

Don’t Wait to Leverage the Employee Retention Tax Credit

If you want to claim the ERTC for wages paid in 2020, the April 15, 2024, deadline will arrive sooner than you think! Confirm your eligibility, gather your supporting documentation, and file your Form 941-X today to get ahead of the busy 2023 tax season. It’s taken about six months for the IRS to issue ERC refunds, so the sooner you file, the sooner you receive this benefit.

While we’ve highlighted the basics, it can still be confusing for small business owners to navigate the ERTC on their own and ensure they apply correctly to maximize their refund and avoid issues. That’s where we come in! Our experienced tax department will guide you and help you properly claim your tax credit. Book an intro call today to learn more and get to know us!

 
Small Business Taxes, TaxJaime Lynn Soares