What Are the Legal Aspects of the Employee Retention Credit?
The Employee Retention Tax Credit (ERTC) allows eligible employers to claim payroll tax refunds if their businesses suffered losses during the COVID-19 pandemic in 2020 and 2021 but continued to pay their staff. Understanding the legal ERTC aspects will help you understand whether or not your business qualifies and how much you can claim.
When dealing with any tax claims, you want to ensure that you follow all steps carefully so you don’t file incorrectly or create issues with the IRS. At Dayes Law Firm, tax attorneys are available to help businesses submit ERTC claims accurately.
To qualify for the ERTC, your business must fall into one of the following categories:
- Your business partially or entirely shut down because of a COVID-19-related government order during 2020 or the first three quarters of 2021.
- Your company’s gross receipts significantly declined during 2020 or 2021’s eligible periods compared to the same quarter in 2019.
- Your business qualified as a recovery startup business for the last two quarters of 2021. To qualify, your business must have a gross revenue of less than $1 million and must have started after February 15, 2020.
Qualified Wage Date Ranges
The legal ERTC aspects include strict date ranges for the qualifying wages you can claim. The dates are as follows:
- 2020 claims: Wages paid between March 13 and December 31, 2020
- 2021 claims: Wages paid between January 1 and September 30, 2021
- Recovery startup business claims: Wages paid until December 31, 2021
The ERTC includes numerous limitations that may disqualify your business or the types of wages you can claim. Here are a few examples of limitations:
- Wages paid using PPP loan forgiveness don’t qualify as eligible wages but don’t disqualify your business from the program.
- Self-employed individuals are not eligible for ERTC unless they employed at least one other individual.
- Tips may count as qualified wages if they are subject to FICA, meaning the employee earned over $20 per calendar month in tips.
- State and local government employers cannot qualify for the program.
One of the most important legal ERTC aspects is calculating the claim. Here are a few tips for calculating your claim correctly:
- Determine your business size status based on your average number of employees in 2019. The threshold for 2020 claims is 100 full-time employees, while 2021’s threshold is 500 full-time employees.
- Add qualified wages for full-time employees based on your business size. Large businesses can only claim wages paid to workers not providing services, while small businesses can claim all wages.
- Use the correct percentage based on the year for your claim. In 2020, you can claim 50% of qualified wages paid to employees, though the rate for 2021 is 70%.
- Don’t go over the maximum wages per employee. In 2020, you can claim qualifying wages up to $10,000, meaning the maximum claim will be $5,000 per employee after the 50% calculation. In 2021, the maximum extends to $7,000 per employee for each quarter.
Forms and Filing Requirements
Businesses can claim the ERTC by amending the tax return using Form 941-X. You must submit claims by April 15, 2024, for 2020 claims and April 15, 2025, for 2021 claims.
If you need support navigating the legal ERTC aspects when filing your claim, contact Dayes Law Firm in Phoenix, AZ, at (800) 503-2000 for a free consultation with our professional tax attorneys.