ERTC and Tax Planning: Aligning the Credit with Your Business Strategy

September 7, 2023
Dayes Law Firm

Does your business retroactively qualify for the 2020 or 2021 Employee Retention Tax Credit (ERTC)? Before applying for this credit, ensure you fully understand the intricacies of the credit. Your eligibility may change for different tax quarters, and taking time to understand the ERTC can help you approach this credit smartly as part of your greater business strategy. 

Here’s what you need to know about ERTC tax planning for your business strategy. 

What Is the ERTC? 

The Employee Retention Tax Credit (ERTC), sometimes written as the Employee Retention Credit (ERC), is a payroll tax credit that certain businesses can claim on wages paid to employees in 2020 and 2021. This credit is available for businesses that experienced a significant decline in gross receipts from pandemic-related shutdowns. 

The ERTC is taken against your portion of Social Security tax and may be worth up to $10,000 per employee for wages paid in 2020 and 2021. 

Differences in ERTC Claiming for Various Quarters

The ERTC has changed slightly in response to different pandemic-related government programs, such as the CARES Act of 2020, the Consolidated Appropriations Act of 2021, and the American Rescue Plan Act of 2021. As a result, different tax rules may apply depending on the period you’re claiming the tax credit for. 

For example, the CARES Act of 2020 made the ERTC available to employers operating a trade, business, or tax-exempt organization and could be claimed against up to 50% of qualified wages paid between March 13 and December 31, 2020.

The Consolidated Appropriations Act of 2021 expanded eligible employers to include PPP recipients and colleges/universities, allowing employers to claim up to 70% of qualified wages paid. Most businesses can claim the first three quarters of 2021, while recovery startup businesses are eligible to claim all four quarters. 

As part of your ERTC tax planning, ensure you understand these differences and claim the maximum amount your business is eligible for. 

Is It Too Late To Claim the ERTC in 2023? 

It’s not too late to claim the ERTC. Eligible employers can claim the tax credit retroactively by amending their 2020 and 2021 tax returns. The deadline to file the amendments is April 15, 2024, for 2020 tax quarters and April 15, 2025, for 2021 tax quarters. 

You will need to file Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return) for each quarter in which you paid qualified wages to employees. The IRS has several examples of this form to help you understand how to fill it out. 

Can You Claim the ERTC on an Income Tax Return? 

Businesses must claim the ERTC on the payroll tax return, not your income taxes. However, even though the ERTC is not considered taxable income, it does create a reduction in wages. You receive back credit for part of the qualified wages you paid to employees in 2020 and/or 2021. 

As a result, you may need to file an amended business income tax return or an administrative adjustment request that reflects the reduction in wages (and consequent increase in taxable income). 

What Happens If You Claim the ERTC Incorrectly? 

Understanding every component of the ERTC is essential to your business strategy. Claiming this ERTC incorrectly could, at a minimum, require you to pay back any credits you receive. More serious mistakes could lead to penalties and interest or, in some cases, criminal charges of tax fraud. 

It pays to have a second pair of eyes on your ERTC application. If you need help with ERTC tax planning, contact Dayes Law Firm today at 866-684-8114 for assistance.