The Employee Retention Tax Credit (ERTC) is a refundable tax credit you should know about if your business lost revenue or had to shut down during the COVID-19 pandemic.
You can still take advantage of the ERTC and use Form 941-X to file retroactively and claim this tax credit until April 15, 2025.
As a business owner, you might not have time to sift through information to understand the fundamental concepts of the Employee Retention Tax Credit. Here is the most important information for you.
The ERTC Timeline: Relevant Laws
The Coronavirus Aid, Relief, and Economic Security (CARES) Act first established the ERTC in 2020. Originally, many businesses couldn’t claim the ERTC because the Internal Revenue Service (IRS) prevented businesses that already took Paycheck Protection Program (PPP) loans from also claiming the ERC.
Then, the Consolidated Appropriations Act of 2021 modified this requirement. It allowed businesses to claim the ERTC and PPP loans as long as they didn’t double-dip. That is, businesses can’t claim wages they paid with PPP loans under the ERTC. This Act also extended the ERTC through 2021.
Then, in November 2021, the Biden administration passed the Infrastructure Investment and Jobs Act. This Act cut the ERTC short, only allowing businesses to claim the ERTC for the first three quarters of 2021. The exception to this was recovery startup businesses, which could claim the credit for all four quarters of 2021.
Who Are Eligible Employers?
To be an eligible employer, you must meet the qualifications set by the IRS. While you may be an eligible employer for one quarter, that doesn’t mean you’re one for every quarter. You should evaluate your business’ eligibility on a quarter-by-quarter basis.
You must either pass the gross receipts test or the suspension of operations test. The gross receipts test requires you to prove a significant decline in gross receipts. For 2020, this requirement is a 50% loss in revenue when compared to 2019, and for 2021, the requirement is 20%.
The suspension of operations test requires that you shut down your business operations partially or fully due to a government order. You cannot pass this test if you shut down to follow Centers for Disease Control (CDC) guidelines or other safety guidelines. It has to be the direct result of a government mandate.
What Are Eligible Wages?
One of the significant fundamental concepts of the Employee Retention Tax Credit is how much you can collect from those eligible wages.
“Eligible wages” refer to the employee wages you can claim under the ERTC. The wages you can claim largely depend on the size of your business. The IRS defines small businesses as having 100 or fewer employees in 2020, and 500 or fewer employees in 2021.
If you run a small business, you can claim all wages, including Social Security and Medicare taxes, you paid during qualifying quarters. If you run a larger business, you can only claim wages you paid employees who were unable to provide services due to a government order.
You can claim a refund of 50% of up to $10,000 per employee for eligible wages you paid in each quarter in 2020. For 2021, the ERTC will refund you 70% of up to $10,000 per employee.
Expand Your ERTC Knowledge With Dayes Law Firm
Dayes Law Firm has extensive knowledge about the ERTC, and we want to help you understand if you qualify and claim your refund. Now that you know the fundamental concepts of the Employee Retention Tax Credit, you can take the next step and file for it. Call Dayes Law Firm at 866-684-8114 to determine your next steps.