What Does the Employee Retention Tax Credit (ERTC) Entail?
Are you interested in learning about ERTC?
The Employee Retention Credit, commonly referred to as ERTC or ERC, made its debut during the early stages of the COVID-19 pandemic as an integral part of the CARES Act relief package. Its primary purpose was to provide an additional incentive for small businesses to retain their workforce, although it often remained in the shadow of the Payment Protection Program.
Nevertheless, the ERTC remains applicable retroactively for both 2020 and 2021. Notably, even small businesses that received PPP loans are eligible to take advantage of the ERTC.
The ERTC constitutes a credit, effectively translating to a reduction in your tax liability. Unlike a deduction, which decreases a business's taxable income, a credit directly diminishes the total tax amount owed to the IRS.
Consolidated Appropriations Act of 2021
In 2021, the Employee Retention Credit underwent revisions that enabled eligible employers to assert 70% of qualifying wages, capped at $10,000 per quarter.
American Rescue Plan Act of 2021
This legislation introduced recovery startup businesses established on or after February 15, 2020, as eligible entities. To qualify, their annual gross receipts should not have exceeded $1 million in either 2020 or 2021, and they must have employed one or more W-2 employees, excluding family members.
Infrastructure Investment and Jobs Act of 2021
Concludes the ERC credit for the fourth quarter of 2021, with the exception of recovery startup businesses.
Understanding How the Employee Retention Tax Credit (ERTC) Operates
The Employee Retention Credit is a refundable tax credit that applies to eligible employee wages. Unlike income taxes, this credit is calculated based on payroll taxes, ensuring that even if you didn't pay income taxes in 2020 or 2021, you can still qualify for it.
The notable advantage is its refundable nature, allowing you to receive a refund exceeding your initial payroll tax payments. For instance, if you meet the criteria for a $50,000 credit under the ERC but initially paid only $10,000 in payroll taxes, you would still obtain the complete $50,000 refund from the IRS. It's important to note that a small non-refundable portion of the ERC is restricted to the amount paid in employee Social Security and Medicare taxes.
What Amount Can My Small Business receive in ERTC?
Receive Through the ERTC?
During the tax year 2020, qualifying small businesses have the opportunity to assert 50% of the initial $10,000 in wages for each employee via the Employee Retention Credit. This accumulates to a potential maximum of $5,000 per employee, and you have the option to apply for this credit in 2022
Throughout the initial three quarters of 2021, qualifying small businesses have the opportunity to assert up to 70% of the initial $10,000 in wages per quarter for every employee, resulting in a potential total of $21,000 per employee.
Collectively, a small business has the potential to secure up to $26,000 in credits per employee who remains employed throughout both 2020 and 2021. It's important to note that the IRS includes certain healthcare expenses within an employee's wages.
Does My Small Business Qualify for the Employee Retention Tax Credit (ERTC)?
Though the Employee Retention Credit (ERC) holds advantages for businesses of various sizes, it particularly favors small businesses in comparison to larger counterparts. To ascertain your eligibility for the ERC and expedite the credit claiming process, you can explore the qualification criteria here.
Impact on Revenue or Full or Partial Business Suspension
Now, to meet the eligibility criteria for the ERC, your business must have encountered either a government-imposed lockdown or a substantial drop in revenue.
If your business was impacted by a complete or partial suspension of operations due to a government COVID-19 directive in any quarter, you may qualify. This encompasses limitations on operational hours or venue capacity.
Additionally, your business could qualify if it underwent a "significant decline" in gross receipts, as defined by the IRS. In the tax year 2020, a significant decline translates to quarterly gross receipts being less than 50% in comparison to the same period in 2019. For the initial three quarters of 2021, it signifies that quarterly gross receipts are less than 80% when measured against the corresponding period in 2019.
During the first three quarters of 2021, if your business didn't experience a 20% reduction in gross receipts compared to 2019, there's an option to opt for the immediately preceding quarter for comparison. This implies that if a business's Q2 of 2021 isn't eligible based on Q2 of 2019, they can instead utilize Q1 of 2021 and compare it with Q1 of 2019 to meet the eligibility criteria.