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Employee Retention Tax: How To Prepare Your Business For ERTC Funds

At the end of 2021, the employee retention tax credit is set to expire. However, this does not mean all the small businesses are out of time to take advantage of the credit. The precise details of the ERTC have changed since it was created by the Coronavirus Aid Relief and Economic Security (CARES) Act, which came into effect in March 2020. Following Covid waves, the ERTC credit got multiple extensions, and there is a suspicion that the ERTC won’t be in effect after December 31, 2021.The recent updates regarding ERTC have made it easy for businesses to attain benefits from it. Between the Consolidated Appropriations Act and American Rescue Plan, the IRS has uncomplicated its criteria for which businesses qualify and increase how much businesses affected by covid-19 can claim. This blog presents a breakdown of what has changed for the ERTC and how businesses can claim tax credit before it’s too late. 

Key Features Of The ERTC

The key features of the ERTC reflect relaxed standards for eligible businesses. Whether small or large, businesses of all sizes can qualify for the ERTC benefits. The IRS uses a variety of other factors to determine if a private sector business or tax exemption organization is eligible for the tax credit. The factors have been in a motion of change ever since the ERTC credit in 2020. The current factors display the following eligibility criteria:

  • A full or partial suspension of trade or business operations during 2020 or 2021 due to governmental orders stemming from covid-09.
  • A decline in the gross receipts of more than 20% during a calendar quarter in 2020 or 2021 compared to the same quarter from the year 2019.
  • Recovery startup businesses are a new invention created after February 15, 2020, and have average annual gross receipts of $1 million or less.

Initially, the CARES Act excluded Paycheck Protection Program loan recipients from qualifying from the ERTC. However, that exclusion has changed, and businesses with PPP loans can also qualify for the ERTC retroactive to March 12, 2020. 

How To Claim ERTC For Business?

“Qualified wages” are the criteria on which eligible business credit was based. Earlier, businesses with 100 employees could only count the wages paid while the employer could not provide service due to COVID-19. The CAA changed this criterion so that any eligible business with less than 500 employees can consider all employees’ wages as qualified for the credit. They can also consider this during times of shut down order or business reopening.

In addition to this, businesses can consider any employer-paid health benefits as part of employees’ qualified wages. Since the introduction of ERTC, a significant amount of credit has also changed. The credit increased from 50% of qualified wage paid during the calendar quarter to 70%, thanks to the Taxpayer Certainty and the Disaster Tax Relief Act of 2020. This rate was kept in mind when the ERTC credit was extended on December 31, 2021.

Now the eligible employers can apply that 70% to their qualified wages with a limit of up to $10,000 per quarter. This led to the increase in the maximum quarterly credit of up to $7,000 per employee, or the amount can divert to $28,000 combined for all four quarters. However, the business that received PPP loans would still receive a maximum credit of only $5000 per employee, which is significant taking into consideration the Covid times. 

Are There Any Exemptions For ERTC TAX Credit?

Another significant change made in the American Rescue Plan Act, including the ERTC, is relaxing up some of the essential restrictions placed on what the IRS considered as the “severely financially distressed employers.” Furthermore, the act allows employers to claim the tax credit for all the employee wages up to the limit as long as they demonstrate a reduction in gross receipts of 90% minimum. In comparison to the same calendar quarter in 2019.

Know-How To Apply For ERTC

Total qualified wages are the essential criteria all eligible employers must report. Another criterion is the related health insurance cost of the quarterly employment tax return to claim the credit. This requires filling out the 941 Form and including relevant information of each quarter. 

The final date to claim the ERTC was December 31, 2021. The businesses that have previously missed the opportunity to claim the ERTC could have taken advantage of that. These eligible businesses can also retroactively claim the ERTC Tax Credit refund on the qualified wages paid for past quarters within the ERTC timeline. For this, the employers would need to file Form 914-X, the Adjustable Employer’s Quarterly Federal Tax Return or Claim For Refund, if they have missed the deadline. This is the golden opportunity for employers to get back on track.

If you are an eligible employer and want to claim the ERTC, it is best to collect all the required documents and then submit them to the IRS before December 31, 2021. The quicker you file the information and submit the form, the sooner you receive the ERTC funds. The turnaround time is roughly 30 to 60 days. You need to initiate this quick Form filling, especially for the 941-X Form. The estimated turnaround time for radioactive claims is nearly 90 to 120 days, and this could include significant delays as the IRS addresses its current backlog of 941-X returns.

How to prepare your business for the ERTC Funds?

Compared to past initiatives, it was easier to qualify for the ERTC in 2021. However, it’s still not a simple process. The employer still needs to go through a lot of payroll data to determine whether they are eligible. After that, they have to collect and complete the documentation to claim the necessary funds. Want to know how does ERTC work? Visit our website for simplified procedures. 

Overall, filing for an ERTC Tax Credit refund is a tedious task, which is why so many businesses partner with CPA Due Diligence to manage their payroll administration and to stay on top of the ongoing legislative changes.

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