Employee Retention Tax Credit: How to Claim, Tips+ 2023

Employee Retention Tax Credit (ERTC) is a tax credit that was introduced as a part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. It was created to encourage employers to retain their employees during the pandemic by offering a tax credit. Here you can find out all the necessary information about the Employee Retention Tax Credit, including how to claim, who are eligible, requirements, documents, other TAX credits, tips.

What exactly is the Employee Retention Tax Credit?

The Employee Retention Tax Credit is a tax credit designed to provide financial relief to businesses impacted by the COVID-19 pandemic. Eligible employers can claim a tax credit equal to 70% of the wages paid to employees during the eligible quarter, up to a maximum of $10,000 per employee per quarter. The credit can be claimed on the employer’s quarterly federal tax return using Form 941.

How does the Employee Retention Credit work?

The ERC is a refundable tax credit, which means that it can be claimed even if the business does not owe any taxes. The credit is equal to 50% of the qualified wages paid to employees, up to a maximum of $10,000 per employee. This means that the maximum credit per employee is $5,000.

To be eligible for the ERC, businesses must have been either fully or partially suspended due to government orders related to COVID-19 or have experienced a significant decline in gross receipts. Businesses with fewer than 500 employees are eligible for the credit.

The qualified wages used to calculate the ERC depend on the size of the business. For businesses with 100 or fewer employees, all wages paid to employees during the eligible period are considered qualified wages. For businesses with more than 100 employees, only the wages paid to employees who were not working during the eligible period are considered qualified wages.

The eligible period for the ERC is from March 13, 2020, to December 31, 2021. Eligible employers can claim the credit on their quarterly employment tax returns, using Form 941.

It is important to note that employers who received Paycheck Protection Program (PPP) loans are also eligible for the ERC. However, the same wages cannot be used to calculate both the ERC and PPP loan forgiveness.

CARES Extended

The CARES Act was extended following the Consolidated Appropriations Act, which made changes to the act. The modifications included extending the Employee Retention Credit (ERC) to nonprofit businesses that are classified as tax-exempt organizations.

Another change was made to the ERC, allowing all employers who received PPP loan forgiveness to qualify for the credit. If federal employment taxes and qualified health plan expenses paid exceeded the loan amount, an employer could get an ERC refund.

ARP Extended

The American Rescue Plan Act (ARP) further extended and edited the ERC during the passing of the Infrastructure Investment and Jobs Act. Under this amendment, eligible employers who paid qualified wages during the first three quarters of 2021 (January through September) could receive a refundable credit of 70% of qualifying wages, up to a maximum of $7,000 per employee, per quarter.

2022 Update

In 2022, an ERC refund can be requested for all qualifying wages paid over the six taxation quarters from April 2020 through September 2021. Eligible employers can receive up to $26,000 per W2 employee they retained during the eligibility period, with a maximum credit of $5k per quarter in regards to 2020 wages and $7k per quarter for 2021 wages.

Eligibility

Significant updates were added to the Employee Retention Credit for all taxable income quarters in 2021, meaning that even if your advisor once said you may not qualify, this may no longer be the case. Both essential and non-essential businesses in any industry, as well as tax-exempt organizations that were affected by the pandemic, can qualify for the credit.

Even companies that had increased gross receipts or were deemed an essential business during the pandemic can still qualify for a refund. The IRS does not discriminate, so if your business was impacted by COVID-19 in any way, shape, or form, you are more likely to qualify for the ERC than not. It is recommended to get a second opinion before losing out on this fully refundable tax credit from the IRS.

Who Qualify?

To qualify for the Employee Retention Credit (ERC), the first step is to have actively carried on your trade or business during the calendar year of 2020 or 2021. The second step is to meet two of the following requirements:

1. Full or partial shutdowns on government orders at the federal, state, or local level.
2. Reduced gross receipts of at least 50% in any quarter of 2020.
3. Reduced gross receipts of at least 20% in any quarter of 2021, or a 20% decrease compared to the same calendar quarter in 2019.

In terms of shutdowns, even if your business was deemed essential and had to remain open, you can still qualify as long as your business was affected in any of the following ways:

1. Limited operational capacity, reduction in goods or services offered.
2. Decreased hours of operation, or shifting hours to increase facility sanitation.
3. Inability to access equipment or work with your vendors.
4. Interrupted operations or supply chains.

In summary, to qualify for the ERC, you must have actively carried on your trade or business during the calendar year of 2020 or 2021 and meet two of the aforementioned requirements. If your business was affected by any of the above, even if you were deemed an essential business and had to remain open, you may still qualify for the credit.

Advanced Payments

In 2020 and 2021, it was possible to receive an advance payment of the Employee Retention Credit (ERC) by withholding Medicare taxes or employer’s employment tax deposits using Form 7220. However, the deadline for filing the Advance Payment of Employer Credits Due to COVID-19 form was January 31, 2022, and the request advance payment form is no longer available on the IRS website.

Currently, the only way to receive fast ERTC refunds is to work with accounting firms that offer advance payments through escrow. These firms typically charge an upfront fee to process your ERTC application and take a certain percentage of your refund after it gets released from escrow. This is the only option available for businesses seeking to receive an advance payment of the ERC.

Requirements & Factors

To apply for an Employee Retention Credit (ERC) tax refund, you may already have most of the paperwork needed if you have gone through the PPP loan process. In addition, there are a few qualifications needed to show that your business was impacted and that you paid your W2 employee during this time.

Beyond the impact listed above, there are a few cut-and-dried qualifying factors that can ensure your ERC application gets approved. These factors include:

1. A 50% drop in quarterly revenues in 2020.
2. A 20% drop in quarterly revenues in 2021.
3. Numerous projects were delayed or canceled due to COVID-related disruptions.
4. Production timelines were delayed by supply chain disruptions.

If your business meets these qualifying factors, it may increase the likelihood of your ERC application being approved.

Documents for the Application

To fast-track your Employee Retention Credit (ERC) refund application, you will need to prepare the following financial documentation. It is important to note that to obtain your refund quickly, you should use a Certified Professional Accountant (CPA) that specializes in ERTC refunds.

1. Quarterly financials for 2019, 2020, and 2021.
2. Quarterly 941s for 2020 and 2021.
3. Quarterly payroll costs and wage reports sorted by employee for 2020 and 2021.
4. Quarterly health insurance premiums paid by the employer.
5. PPP Loan Forgiveness Application (Form 3508) for any PPP loan(s) sorted by entity.
6. Ownership information, including the name of all owners and % ownership interest, as well as any family members on the payroll.
7. Any filed 941x amendments yet to claim ERTC from the prior quarter.
8. Documentation that shows how many full-time, non-leased employees your company employed in 2019 if you leased employees from a Professional Employment Organization (PEO).

While the paperwork can be cumbersome, it is important to remember that the Employee Retention Credit is a tax refund, not a loan. This means that you will never have to pay it back, and you can use the money any way you see fit.

The Employer Size

To claim the Employee Retention Tax Credit (ERTC), at least one full-time employee being paid W-2 wages is required. However, the qualified wages eligible for a tax refund differ between small businesses and large companies based on the average number of full-time employees held in 2019.

Small Employers

To determine eligibility for the ERTC as a small employer for the 2020 claim, you must have averaged 100 or fewer employees that worked full-time in 2019. For a 2021 claim, companies with less than 500 or fewer full-time employees are also considered small employers.

As a small employer, all wages paid to employees providing services, and not providing services can be claimed. There is no calculation required for part-time employees as they do not count against the small employer status.

Large Employers

If a company averaged more than 100 employees on a full-time basis in 2019, it would be considered a large employer when claiming a 2020 tax credit. Companies that employed more than 500 employees who worked full-time in 2019 would also be considered large employers for a 2021 claim.

If a company has a large employer status for the ERTC 2019 reference period, only wages paid to employees who were unable to perform their duties can be claimed.

In summary, the qualified wages eligible for an ERTC refund differ between small businesses and large companies based on the average number of full-time employees held in 2019. Small employers can claim all wages paid to employees, while large employers can only claim wages paid to employees who were unable to perform their duties.

Recovery Startup Business

Any legal business entity that began operations on or after February 15, 2020, and paid qualifying wages to W-2 employees can claim employment tax credits due to COVID-19, regardless of whether or not they experienced a significant decline in gross annual receipts or were fully or partially suspended in any calendar quarter.

The eligibility of these previously ineligible recovery startup businesses was only added to the Employee Retention Credit (ERC) tax credit after the enactment of the American Rescue Plan Act (ARPA). Recovery startup businesses (RSBs) are now eligible for the ERC, provided they had average annual gross receipts of less than $1,000,000.

This federal tax credit only applies to the third and fourth quarters of 2021 (Q3 and Q4). It has a maximum credit of $7,000 per employee, a quarterly maximum of $50,000, and a total maximum refund amount of $100,000.

Refund Status

Unfortunately, being eligible for employee retention credit refunds will not speed up the processing time of the Internal Revenue Service. As of October 2022, clients are currently receiving their ERC refund checks within 6-9 months of their filing date. However, if you need to speed things up, there are some advance payment options available with a monthly interest rate of 1-2%.

To check your ERC refund status, you can use the Where’s My Refund tool on the irs.gov website. This form can provide claim updates within 24-48 hours of electronically filing Form 941 or 941-x. You can also use the IRS2Go app to receive updates on your phone, although it may not be as effective as the online tool.

If you prefer to speak with a person, you can call the IRS on their toll-free hotline at 800-829-4933. However, the average hold time for early-day callers is currently 30 to 60 minutes.

Other TAX Credits

In addition to the Employee Retention Credit (ERC), there are other tax incentives available for businesses, such as:

Work Opportunity Tax Credit (WOTC)

This tax credit, found under Section 51 of the Internal Revenue Code, provides federal employment tax relief to encourage employers to hire Americans in certain targeted groups who have consistently faced barriers to employment.

Research and Development (R&D) Tax Credit

This tax refund, found under Section 41 of the IRC, is available to any organization that engages in certain activities to develop new or improved products, processes, software, techniques, formulas, or inventions.

Energy Efficiency Tax Credit (Section 179D)

This tax benefit is available to commercial building owners and contractors that reduce energy and power costs in government-owned buildings.

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