Detailed Review of the ERTC Program: Key Insights for Employers
The Employee Retention Tax Credit (ERTC) is a refundable tax credit program implemented to support businesses during the COVID-19 pandemic. Initially introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, this program aims to help small and medium-sized businesses continue paying their employees, even in times of financial distress (Biz2Credit). The ERTC covers eligible wages paid between March 13, 2020, and December 31, 2021 (Internal Revenue Service).
To qualify for the ERTC, businesses must have experienced a shutdown due to COVID-19 or significant declines in gross receipts during specific time periods. The credit calculation varies depending on the year; in 2020, eligible employers could claim up to $5,000 per employee, while the cap increased in 2021 for eligible periods (Biz2Credit). Recovery startup businesses may also claim the ERC for wages paid after June 30, 2021, and before January 1, 2022 (IRS).
This detailed review of the ERTC program will provide a comprehensive analysis of eligibility criteria, credit calculation methods, and the necessary steps businesses must take to claim the credit. Gaining a deeper understanding of the ERTC
Overview of the Employee Retention Tax Credit (ERTC) Program
The Employee Retention Tax Credit (ERTC) is a refundable tax credit designed to encourage employers to keep employees on their payroll during the COVID-19 pandemic. Initially introduced as part of the CARES Act, the ERTC applies to businesses that either had significant declines in gross receipts or were fully or partially shut down due to governmental orders.
The ERTC initially offered a tax credit worth 50% of up to $10,000 in qualified employee wages paid between March 13, 2020 and December 31, 2021, granting a maximum credit of $5,000 per employee. Nevertheless, the percentage of qualified wages was later increased to 70% for 2021.
The ERTC covers a wide range of employers, including private-sector businesses and tax-exempt organizations. Employers who were financially impacted by COVID-19 and sought assistance could benefit from the ERTC alongside other programs provided under the CARES Act and the Families First Coronavirus Response Act (FFCRA).
To be eligible for the Employee Retention Tax Credit (ERTC), employers must fulfill specific criteria set by the IRS. Eligible employers include those who have experienced a full or partial suspension of their operations due to COVID-19 and orders from an appropriate governmental authority, or those who face a significant decline in gross receipts during specific periods in 2020 or 2021.
Impact of COVID-19 on Business Operations
For the purpose of ERTC eligibility, the impact of COVID-19 on business operations is defined in terms of suspension or limitation of commerce, travel, or group meetings. This impact on operations must be in direct response to orders from an appropriate governmental authority.
In 2020, when the ERTC was first introduced, the policy required businesses to have lost more than 50% of their gross receipts in any quarter while paying wages, which included healthcare benefits. Subsequent changes made to the program in the Consolidated Appropriations Act (CAA) expanded its eligibility and provided more clarity around its interaction with Provider Relief Funds and Payroll Protection Program (PPP) loans.
ERTC eligibility and benefits are based on the number of full-time employees a business had on their payroll in 2020 and 2021. Depending on eligibility, businesses can receive up to $26,000 per employee, which is money that they have already paid to the IRS in payroll taxes for their W2 employees.
Calculation of ERTC
Credit Amounts and Maximums
The Employee Retention Credit (ERC) was a refundable tax credit program for businesses affected by the COVID-19 pandemic from March 13, 2020 to December 31, 2021. In the year 2020, the ERC's amount was calculated as 50% of qualified employee wages paid in a calendar quarter, with eligible wages per employee maxing out at $10,000. Consequently, the maximum credit available for each employee during 2020 was $5,000. (source)
For the first two quarters of 2021, the maximum employee retention credit was $7,000 per employee per calendar quarter, totaling $14,000 for this period. (source)
Wages and Qualified Health Plan Expenses
Calculating ERTC hinged on determining the qualified employee wages, including certain health plan expenses. Qualified wages depended on the size of the employer: fewer than 100 full-time employees in 2020 and fewer than 500 full-time employees in 2021. For smaller employers, all wages paid to employees during the pandemic-affected period qualified for the ERTC. Larger employers could only claim the credit for wages paid to employees who were not providing services due to the pandemic.
Qualified health plan expenses were the expenses employers paid to maintain group health plans during the COVID-19 crisis. These expenses were taken into account when calculating the ERTC for the respective period.
In summary, the ERTC calculation involved recognizing eligible employee wages and qualified health plan expenses to determine the credit amounts and maximums. The program aimed to support businesses in continuing to pay their employees during the COVID-19 pandemic.
Claiming the ERTC
The Employee Retention Tax Credit (ERTC) is a significant relief measure for businesses impacted by the COVID-19 pandemic. In this section, we will discuss the process of claiming the ERTC and highlight important aspects that employers should be aware of when applying for the credit.
To claim the ERTC, employers must file Form 941, Employer's Quarterly Federal Tax Return, with the Internal Revenue Service (IRS). This form is used to report income taxes, social security tax, and Medicare tax withheld from employees' paychecks. Additionally, Form 941 is used to claim the ERTC by calculating the credit amount and reconciling it with the employment taxes for the quarter.
Employers will need to provide specific information related to their eligibility for the ERTC, such as the COVID-19 impact on their business and the total wages paid to employees during the quarter. You can find detailed instructions about Form 941 on the IRS website.
In case employers discover they were eligible for the ERTC after filing their original Form 941, they can file an amended return using Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund. Amended returns can be filed for any quarter of 2020 and 2021 that the business was eligible for the ERTC due to COVID-19 pandemic-related disruptions.
When filing Form 941-X, employers must report the adjustments to taxable wages and employment taxes based on the eligible ERTC amount. Detailed instructions for completing and filing Form 941-X can be found on the IRS website. Remember to keep accurate records of the ERTC claim and supporting documentation in case the IRS requires further verification.
Interaction with Other Relief Programs
Paycheck Protection Program (PPP)
The Employee Retention Tax Credit (ERTC) interacts with the Paycheck Protection Program (PPP) in several ways. As part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the PPP offers forgivable loans to eligible businesses to cover payroll expenses for maintaining staff during the pandemic. However, employers who receive a PPP loan cannot claim the ERTC for the same payroll period.
A significant change in 2020, as mentioned by the IRS, allowed eligible employers with a PPP loan to claim the ERTC. However, employers cannot double-count wages for both PPP loan forgiveness and ERTC calculations. In other words, they must choose one program to apply their wages towards.
Shuttered Venue Operators Grant
The Shuttered Venue Operators Grant (SVOG) is another relief program designed to help businesses affected by COVID-19. The SVOG offers grants to eligible live venue operators, promoters, and related businesses to cover payroll, rent, utilities, and other expenses. Similar to the PPP, the ERTC interacts with the SVOG in terms of eligible wages and benefits.
According to Withum, businesses receiving funds from the SVOG program must take into account that the same wages cannot be applied to both the ERTC and the SVOG. Businesses should carefully consider which program provides the highest benefit, whether it be the SVOG or the ERTC, as each program offers differing coverage percentages.
Recent Changes and Updates
The Employee Retention Tax Credit (ERTC) program has undergone several legislative changes since its inception under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. With these modifications, the ERTC has become accessible to a larger number of employers, including those that received Paycheck Protection Program loans. The following sub-sections discuss the most significant changes to the ERTC program under the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA).
Consolidated Appropriations Act
The Consolidated Appropriations Act, passed in December 2020, introduced a series of changes to the ERTC program, including:
- Allowing recipients of PPP loans to take the credit retroactively for 2020, which was previously not allowed.
- Expanding eligibility criteria for businesses with significant declines in gross receipts.
- Increasing the maximum credit amount for qualified wages paid between January 1, 2021 and June 30, 2021.
These amendments aimed to provide further financial assistance to struggling businesses and promote employee retention during the COVID-19 pandemic.
American Rescue Plan Act
The American Rescue Plan Act, enacted on March 11, 2021, extended the ERTC program through December 31, 2021. Key updates to the ERTC under ARPA include:
- Extending the credit period from June 30, 2021, to December 31, 2021, allowing eligible businesses to continue benefiting from the credit for the entire year.
- Introducing a separate $7,000 cap per employee for the third and fourth quarters of 2021, in addition to the existing $5,000 cap per employee for the first two quarters of the year.
- Expanding the definition of eligible employer to include certain recovery startup businesses and severely financially distressed employers.
The ARPA updates were implemented to provide ongoing relief and support to businesses affected by the pandemic, helping them retain employees and maintain operations during uncertain times.
In summary, the Employee Retention Tax Credit (ERTC) has provided valuable support to businesses affected by the COVID-19 pandemic. This refundable tax credit, designed to encourage employers to continue paying employees during periods of financial hardship, was available from March 13, 2020, to December 31, 2021 (IRS).
The credit amount varied over time, with up to 50% of qualified wages covered from March 12, 2020, to January 1, 2021, and 70% of qualified wages in 2021, with certain limits per employee and quarter (Thomson Reuters). Eligible employers could receive these payroll tax credits for wages and health insurance paid to employees (Forbes).
Despite the potential benefits, some small business owners were not fully familiar with the ERTC program. A study by the NFIB revealed that only 4% of owners considered themselves very familiar with the program, and only 8% utilized it in 2020 (NFIB).
As the ERTC program has now ended, business owners should consult with tax professionals to ensure they have claimed all applicable credits and stay informed about any changes or future relief programs.