Maybe you heard a rumor about a tax credit from the Federal government at a recent chamber of commerce meeting. Or you glanced at a news article about refundable taxes. Or maybe you dreamed about Uncle Sam sending you a check thanking you for keeping the economy afloat during a global pandemic.
Great news: it’s true, and it’s called the Employee Retention Tax Credit (ERTC). The Internal Revenue Service is willing to refund a part of your payroll taxes if your small business was negatively impacted by COVID-19.
As both a payroll service provider and an accounting firm, we understand the ins and outs of the IRS, and the valuable tax credits can have for a small business. And we want every small business owner to take advantage of this program because it’s been a rough couple of years. And you have really kept our economy going.
So, let’s figure out if your business is eligible, how much your tax credit could be, and how you can claim it.
What is Employee Retention Tax Credit?
It is an employer payroll tax credit for “qualified wages” provided to business owners to relieve some of the economic impacts of the COVID-19 pandemic. So, employers who paid their quarterly payroll taxes can get a refund of those taxes. And if they qualify for the credits, they’ll get a refund from Uncle Sam!
Here are the basics:
Who qualifies: Business owners who ran a business, conducted a trade, or provided a service in 2020 and 2021, including tax-exempt organizations.
What are the conditions for eligibility:
Experienced a government-mandated business closure or reduction of services due to COVID-19. OR Experienced a significant reduction in gross receipts.
Is this similar to a Paycheck Protection Program (PPP) loan? The ERTC has a similar intention, but the funds are either a refund or credit on your employer’s payroll taxes. If you’ve already paid your 2020 and 2021 payroll taxes, you will receive a refund. If you haven’t filed yet, you can apply for credit through your tax filing.
Can employers still apply for the ERTC? YES!
Disclaimer: As with all things related to the Internal Revenue Service, there are exceptions, special circumstances, and nuances that determine not only how much an employer could benefit from the ERTC, but also the funds, time frame, and reasons used to qualify. Be sure to refer to the most recent IRS guidance around ERC for more information. Employee Retention Credit | Internal Revenue Service
Nerdy background on creation of ERTC
In March 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES), which included the ERTC, to offset the impact of COVID-19 and encourage employers to keep full-time employees on their payrolls.
In late 2020 Congress approved the Consolidated Appropriations Act of 2021, which allowed for businesses who received Paycheck Protection Program (PPP) loans to claim employee retention tax credits, just not for the same expenditures used when applying for the PPP loan.
The Infrastructure Investment and Jobs Act amended the ERTC one last time to end eligibility at the end of 2021’s third quarter. ERTC can be claimed on the employer’s quarterly payroll tax filings from March 13, 2020, to September 30, 2021.
How much is the Employee Retention Tax Credit?
Since we’re talking about the government, the answer isn’t straightforward, but we’re simplifying it for you here:
Calendar Year 2020
For each qualifying employee wage paid, the employer can receive a 50 percent refund on a maximum of $10,000 per employee for all of Calendar Year 2020. This means employers are eligible for a total of $5,000 in tax credits per employee in 2020.
In 2020, if you qualify for the ERTC:
You employed 10 “average full-time” employees.
Each employee earned $10,000 in wages (& tips) for the calendar year.
You get a $50,000 refund.
(10 EEs x $5,000 ) = $50,000
Calendar Year 2021
For 2021, employers can receive a 70 percent refund on a maximum of $10,000 per employee per calendar quarter for the first three quarters. This means employers are eligible for a maximum of $7,000 per employee per quarter in 2021.
In 2021, if you qualify for the ERTC:
You employed 10 “average full-time” employees.
Each employee earned $10,000 in wages (& tips) each of the first three quarters
You get a $210,000 refund.
(10 EEs x $21,000 ) = $210,000
This is big money, people! No Whammies!
Unlike any math class you’ve ever taken, I’ve just given you the answer without showing you how to solve for it. And now, I’m going to walk you through arriving at the above solution. You might want to sit down.
What are the eligibility requirements for ERTC?
For 2020, the eligibility rules are straightforward. If your small business experienced a 50 percent reduction in sales revenue (as compared to 2019) during the calendar year, then you would qualify for the credit.
In 2021, the government changed all the rules.
- Businesses are eligible based on performance during calendar quarters, not the entire year like 2020. And only the first three quarters of 2021 can be considered.
- The reduction in sales revenue is 20 percent over the same quarter in 2019. This means that many employers who were not eligible for ERTC in 2020, might definitely be eligible for ERC in 2021.
- Additional eligibility option where if you experienced one or more calendar quarters where operation ceased or was reduced due to Covid-related government mandates.
You’ll qualify for the ERTC if you meet either the reduction in sales revenue option OR the government-mandated decrease in operations in 2021.
Does my small business qualify for ERTC in 2021?
Lost revenue > 20%
500 employees or less
Max Credit is $7,000 per full-time employee per qualified quarter for the first three quarters.
But what do you mean by government-mandated reduction in operations?
This eligibility rule requires a bit more interpretation to fully understand if your business meets it, and that’s where your payroll provider or certified public accountant (CPA) can provide some much-appreciated guidance.
Government mandates include, but are not limited to:
- All federal mandates
- Limited State of Emergency Orders from a Governor’s Office
- Municipal, County, or State Executive Orders
- Mandates from Health Directives, such as County Health Departments
These mandates stopped or limited your business operations in some way. Possibilities include:
- Reduced hours of operation, i.e. bars having to close at 10 p.m. when they’d normally be open much later
- Reduced capacity orders, i.e a retail furniture store that could only allow 15 people in their store instead of a normal capacity
- Suspension of travel and meetings, i.e.(like a company who was not allowed to attend trade shows or large group meetings
- Partial suspension of operations: if you had serious supply chain issues or were unable to secure certain products you needed to keep your business going.
If you’re reading this and you had supply chain issues and would like to talk through your specific situation, you can book time with our team to discuss your options..
What are eligible wages?
In qualifying quarters, eligible wages are all wages and health insurance benefits paid to an employee working for a small business. This does include tips paid out through payroll.
Eligible wages for large employers are wages and health insurance benefits paid to an employee when s/he was not working due to government-related reductions of services or closures. Whirks’ helps small business owners. If you are a large business owner, please contact your accounting firm, CPA, or payroll provider directly for specific details on your eligibility.
How does the IRS define large and small businesses for ERTC qualifications?
In 2020, the IRS defines small businesses as those with 100 or fewer average full-time employees.
In 2021, the IRS increased the size of a small business to those with 500 or fewer average full-time employees. Large companies have more than 100 employees in 2020, and more than 500 in 2021.
Oh wait! What does the IRS mean by “average full-time employee”?
Full-time employees work at least 130 hours per month. Add all the employees that worked more than 130 hours per month and divide by 12; this is your average number of full-time employees and how to determine if you are a large or small business.
Keep in mind, that if you have part-time employees, and meet the eligibility requirements for ERTC, their wages count in your credit calculation. But if you’re on the line between the IRS’ definition of small or large business, be sure to do the math to ensure you don’t exceed the average full-time employee rule.
If my business qualifies for the ERTC, how do I claim it?
The ERTC is claimed on IRS Form 941 when filing your business’ quarterly payroll tax.
Can a business retroactively claim the employee retention tax credit they have already filed their 2020 and 2021 quarterly payroll taxes? YES!
Businesses can file an adjusted employment tax return via IRS Form 941-X.
Businesses can claim the ERTC by filing Form 941-X within three years of filing the original tax return for the same quarter. So, if you realize you qualify for the ERTC for any part of 2020, you have until December 2023 to file an amended return and receive the credit. If you need to file an amended return for the second quarter of 2021, it will need to be filed no later than June 30, 2023.
It’s Time to Grab that Dough!
So the federal government actually created a way to pay you back for continuing to run your small business through a once-in-a-lifetime pandemic. It wasn’t a COVID-induced fever dream.
The Employee Retention Tax Credit is available for business owners who lost revenue directly due to the COVID-19 pandemic or from government-mandated suspensions of business activity. For businesses who qualify under the 2020 rules, refunds of up to $5,000 per employee are headed your way. And for businesses who meet the 2021 ERTC rules, you are looking at credits of up to $21,000 per employee!
As with all tax endeavors, the mental gymnastics to determine if your business qualifies for the ERTC can be strenuous, but REALLY worth it.
Your payroll provider should have calculated the amount of your credit and filed the right forms with the IRS. But, if they haven’t and you don’t have the time or headspace to manage this, Stokes & Company CPA’s are here to assist you. With four locations across the Upstate and Western, NC to serve you, make your appointment today for your business accounting needs!
Need Payroll help? Visit our sister company, Paysmart Payroll today.