Demystifying the Employee Retention Tax Credit: Key Concepts

August 29, 2023
Dayes Law Firm

The Employee Retention Tax Credit, referred to as the ERTC or ERC, has aided businesses around the country in softening the impact of COVID-19. It isn’t too late to file for the ERC, but some business owners feel intimidated or overwhelmed by the information available.

There are modifications to research, qualifications to meet, and documentation to complete. Here are the key ERC concepts so you can easily determine whether it would benefit your trade or business. 

Defining the ERC 

Before diving into the ERC details, it’s important to establish a basic understanding. The ERC is a refundable tax credit offered by the government for several quarters between 2020 and 2021. 

This credit offers refunds for employee wages and health benefits of varying percentages depending on the year. Congress implemented the ERC as part of the CARES Act, making many extensions and modifications over the years. These modifications altered who could claim the ERC and for how much. 

Key ERC Concepts

Finding all relevant information about the ERC can feel like tying yourself in a knot. Here are key concepts behind the curtain of the ERTC program.

Qualifications 

To be eligible for the ERC, you must meet the qualifications for one of two tests: the gross receipts test or the suspension of operations test. 

The gross receipts test requires you to prove a significant decline in gross revenue: 50% for 2020 and 20% for 2021. You should compare these numbers to the correlating quarter in 2019. 

The suspension of operations test asks you to prove your business had to partially or completely suspend normal business operations due to a government order. 

Disqualifications 

There are a few disqualifications to be aware of:

  • Self-employed individuals cannot file for the ERC
  • Employers cannot claim the ERC for employees who are related to them
  • While you can claim the ERC after collecting a PPP loan as of 2021, you cannot claim the same wages for the ERC that you paid with your PPP loan

Available Credit 

In 2020, eligible employers may collect up to 50% of their employees’ wages. For 2021, employers may collect up to 70% of their employees’ wages and healthcare expenses. For both years, the maximum limit is $10,000 per employee.

Employers may have more credit available to them if their business qualifies as a small business. The CARES Act defined a small business as one with 100 or fewer employees. The Consolidated Appropriations Act changed this to 500 or fewer employees for 2021. 

Timeline and Process

Filing for the ERC and waiting for your refund is a long process. Once you’ve determined your business’ eligibility, you can fill out IRS Form 941-X to amend a previously filed tax return. This is called filing retroactively. 

The IRS will review your form and decide which calendar quarters you qualify for the ERC. The 2020 ERC period was March 13, 2020, to December 31, 2020, while the 2021 ERC period was January 1, 2021, to June 30, 2021. 

It will take six to nine months for your application to process and up to a year before you collect the refund.

Want to File the ERTC? Contact the Dayes Team of Experienced Tax Attorneys

If you meet any of the above qualifications and want to take the next step by filing for the ERC, having an experienced tax attorney on your side will help maintain a smooth process. Our ERC team at Dayes Law Firm has helped hundreds of businesses file for the ERC. If you want to be next, call (866) 567-4510 for a free consultation.