If you’re a business owner or an HR professional, you’ve probably heard of it. Employee Retention Tax Credit (ERTC) Until now, this refundable tax credit was introduced as part of the CARES Act in March 2020 to help employers keep their employees on payroll during the COVID-19 pandemic. Although ERTC has been around for a while, there are still many businesses that are not taking advantage of it. If you are one of them, now is the time to act. In this blog post, we’ll cover everything you need to know about ERTC and how to claim it in 2023.
What is an Employee Retention Tax Credit?
ERTC is a refundable tax credit that allows eligible employers to take a credit against payroll taxes equal to 70% of qualifying wages paid to employees over a specified period of time. Credit is limited to $7,000 per quarterly employee; this means that the maximum credit a business can take per employee is $28,000 for the full year.
Who is eligible for ERTC?
To be eligible for ERTC, your business must meet one of two criteria:
- In any calendar quarter of 2020 or 2021, you had to suspend operations, in whole or in part, due to an appropriate government order to limit trade, travel or group gatherings due to COVID-19.
- You experienced a significant decline in gross revenues in any calendar quarter of 2020 or 2021. A significant decrease in gross revenues is defined as a 50% or more decrease in gross revenues for a calendar quarter compared to the same quarter of the previous year.
If your business meets any of these criteria, you may be eligible for ERTC.
Qualified Amounts
For 2020, the maximum loan amount per employee is $5,000, and the loan is calculated as 50% of the qualifying wages paid to an employee during the specified period from March 12, 2020 to December 31, 2020. Qualifying fees include certain health conditions. Plan expenses in addition to cash fees.
For 2021, the maximum loan amount per employee is $28,000 and the loan is calculated as 70% of qualifying wages paid to an employee during the specified period from January 1, 2021 to December 31, 2021. Qualifying fees include certain health conditions. Plan costs excluded from employer’s payroll taxes under the Families First Coronavirus Response Act, and employer-provided qualified sick and family leave fees.
For 2022, the maximum loan amount per employee is $10,000 and the loan is calculated as 75% of qualifying wages paid to an employee during the specified period from January 1, 2022 to December 31, 2022. Qualifying fees include certain health conditions. Plan expenses in addition to cash fees.
It’s important to note that the maximum loan amount applies to every employee, so if you have more than one eligible employee, you could potentially get a substantial loan. However, the credit cannot exceed the employer’s share of Medicare tax liability for the quarter, and any excess credit can be carried forward to offset future payroll taxes.
Qualifying fees
Qualifying fees are an important factor in determining the amount of Employee Retention Tax Credit (ERTC) your business can claim. Qualifying compensation is the annual wage you pay to eligible employees during the specified period.
- Qualifying fees for 2020 are those paid between 12 March 2020 and 31 December 2020.
- Qualifying wages for 2021 are wages paid between January 1, 2021 and December 31, 2021.
- Qualifying wages for the year 2022 are wages paid between January 1, 2022 and December 31, 2022.
For the purposes of calculating ERTC, qualifying wages include certain health plan expenses and employer-provided qualifying sick and family leave wages that are excluded from employer’s payroll taxes under the Families First Coronavirus Response Act.
The exact definition of qualifying fees depends on the size of your business. If you have 500 full-time employees or less, all wages you pay during the specified period are considered qualified wages, regardless of whether the employee is employed. If you have more than 500 full-time employees, only wages paid to employees who have not served within the specified time are eligible for the credit.
It is important to note that not all fees are ERTC compliant. For example, wages paid to family members of the business owner, wages paid to ineligible employees, and wages already covered by another COVID-19 assistance program, such as the Paycheck Protection Program (PPP), are not considered eligible fees for ERTC.
As always, it’s important to consult a tax professional or accountant to make sure you’re calculating your qualifying salary correctly and maximizing your ERTC.
How to request ERTC?
If you’re eligible for ERTC, you can file a claim by completing Form 941, the Employer’s Quarterly Federal Tax Return. You can request a loan on your Form 941 for the quarter for which you paid a qualifying salary. If your loan debt exceeds the payroll tax amount, you can request repayment of the excess loan.
What’s new in ERTC in 2023?
ERTC has been extended until December 31, 2022 by the 2021 Consolidated Appropriations Act and the 2021 American Recovery Plan Act. In addition, credit has been extended in several ways:
- Credit rate increased from 70% to 75% of qualifying fees.
- The maximum credit per employee quarterly increased from $7,000 to $10,000.
- The definition of “recovery startup business” has been expanded to include businesses that start operations after February 15, 2020, with annual gross revenue of $1 million or less.
Why should you claim ERTC in 2023?
Claiming that if you are eligible for ERTC, this could provide significant financial relief for your business. The credit can be used to offset payroll taxes, which can help reduce your tax liability. Additionally, if the credit exceeds your tax liability, you can claim the return of excess credit, which can provide much-needed cash flow for your business.
Solution
The Employee Retention Tax Credit is a valuable tax credit that eligible businesses can take advantage of. If you haven’t already, it’s worth checking if your business is eligible for a loan and calculating the potential amount you can get. With the expansion of credit and an increase in the maximum credit per employee quarterly, ERTC can provide even more relief for your business in 2023.
Don’t wait to claim ERTC – the sooner you apply, the sooner you’ll get the loan. Consult a tax professional or accountant to make sure you claim the loan correctly and maximize the amount you can get.
With the ongoing effects of the COVID-19 pandemic, ERTC is just one of the ways the government provides assistance to businesses. Learn about other potential tax credits and resources that can help your business during this time.