Besides health, the COVID-19 pandemic took over employment and businesses. As a result, less than 8.5 million people were employed in February 2021 compared to the previous year. The federal government introduced the CARES act to meet the expected employment rate so employees could benefit from the Retention Tax Credit program. Often known in the reference form of ERC, the Employee Retention Tax Credit (ERTC) benefit scheme generally creates short-term confusion for new business owners. The credit program has few nuances, but you’ll easily find your way through the most lucrative credit programs and attractive incentives with the following summary of the benefits. Ultimately, you’ll retain your employees and reap the maximum opportunities from the ERTC program. However, you need to know the ERTC eligibility 2021 eligibility to leverage the policy. The benefits of this special credit facility are worthy for the employees, but their scope also extends to the businesses. Let’s discuss the topmost advantages of the ERTC for businesses.
Employee Retention Tax Benefits
ERTC provided tax benefits to the employees with entitlement to a tax credit facility of 70% for a credit limit of $10,000 of the qualifying wages of an employee quarterly in 2021. The capped quarterly credit limit was at approx.—$ 7,000 per employee, but who qualifies for the employee retention tax credit is the most important question that people use to ask every time (we’ll discuss it later.)
For 2020, a 50% tax credit was allowed for $5,000 of the employee’s annual wage. To sum it up, the tax credit facility saves a large sum in taxes.
Lower Tax Liability for Social Security with ERC
With the ERC tax credit scheme, companies lower their tax liability for social security. It works in the following manner.
You’re eligible for a refund when the credit limit you availed from ERC is higher than the Social Security liability. The total credit amount is settled on the employer’s 941 Form by the quarter’s end.
Credit Extension Till 2021
With the pandemic still affecting businesses in many regions, the federal government shifted the ERTC to 2021. The benefits are available for all four annual quarters. Businesses get new benefits with this extension. For example, with the 2021 update, employers get 70% of an employee’s initial $10,000 wages. Furthermore, the expansion is also available with the employer’s taxes for the third and fourth quarters.
Many Sectors are Eligible for Claiming the Tax Credit
There is a criterion by the IRS to determine whether the businesses of different sectors qualify for the benefits or not. Organizations like tax-exempted entities and nonprofit groups qualify for these tax credits. Healthcare specialization businesses and government entities like universities and colleges are also eligible for the tax credits.
ERC Can Be Claimed For Many Employees
How do I apply for ERTC, or how many employees can apply for it might be troubling you these days, right? Irrespective of the size of the workforce, the organization can claim Employee Retention Tax Credit for the varied count of employees. For example, a small-sized business with less than 100 employees is eligible to claim ERC on the wages of all employees. According to the CARES act, a small employer has less than 100 employees. In the case of more than 100 employees, it is still possible to claim the Tax on ERTC, but those employees have to be categorized as “not working.”
Claiming ERC Isn’t Complicated.
ERC benefit is that it can be claimed upon qualifying. You must claim the ERTC on the federal employment returns with Form 941. Employees can amend the Quarterly Federal Tax Return on the 941-X Form.
How Do Employers Get Tax Benefits Under ERTC?
Under the refundable tax credit facility, businesses can reduce $26,000 from each employee’s tax by around $26,000. This is meant for business payroll instead of contractors. Unlike tax deductions minimizing businesses’ taxable income, the credit from ERTC is deducted from the total taxable amount owed by the qualifying business.
It means that businesses availing of the tax credit benefits owe few taxes.
Find Out Whether Your Business Qualifies For ERTC Or Not?
These main factors help determine whether your business is eligible for claiming ERTC or not:
The Business Scale
Firstly, large-scale organizations are not eligible for the scheme. The CARES act states you have to have 100 employees or less to get a tax rebate. However, under the CAA (consolidated appropriations act), the businesses expanded their eligibility to 500 or fewer employees, and due to this measure, many large-sized companies are qualified for ERTC benefits.
The CARES act states that if any business is granted a PPP loan, it can’t get ERTC. The rule later got dismissed by the ARPA (American Rescue Plan Act), and CAA continued letting the businesses reap the benefits of both ERTC and PPP loans. However, companies shouldn’t double-dip with such programs. Therefore companies can’t claim ERTC for employee wages paid through PPP loan funds.
Pandemic Impact Assessment
Another factor is that qualifying businesses must show a significant negative impact of the pandemic. According to the CARES act, it is possible in either of the two conditions:
- Workflow disruption with stay-home orders: During the pandemic, many non-essential businesses suffered through shutdown orders from the government. However, you have a partially disrupted business if your company is operating with a lesser workforce and is technically still operating. You can consider backing off for the gross receipts aspect in such a case.
- Low gross receipts: The CARES act policies state that businesses are ERTC qualified if they can show a significant loss of up to 50% in gross receipts compared to the previous year.
For eligibility of gross receipts, you need to look quarter by quarter and compare 2020 with 2019. Let’s suppose if, in Q1 2019, the gross receipts were $250,000, and in Q1 2020, the business only had 110,000, then it qualifies for ERTC. In the year 2021, the business should compare 2021 Q1 to 2019 Q1, and if the gross receipts are reduced by 80% compared to 2019, your business also becomes eligible for ERTC.
Updated Guidance For Claiming Employee Retention Credit
The IRS issued new guidance on ERC, including advice for employers paying qualified wages after 30th June 2021, and before 1st Jan 2022, with issues applying to the ERTC in 2020 and 2021. The updated Notice 2021-49 emphasizes prior guidance about ERC in Notice 2021-20 and Notice 2021-23.
The guidance slightly changed the ARPA to ERTC applicable to the 3rd and 4th quarters in 2021. Here you will get to know how does the employee retention tax credit work:
- ERTC doesn’t apply for qualified wages, considered for payroll costs of shuttered venue grant under section 324 of Economic support to Nonprofit organizations, restaurant, venues act, or revitalization granted under the 5003 section of the ARPA.
- The credit facility is available to eligible employers, including the “startup businesses for recovery.”
- Modified qualified wages definition for employers who are “severely financially distressed.”
The 2021-49 Act also addresses different questions about the ERTC that have been put up for the IRS and Treasury Department:
- The ideal definition of a full-time employee and whether it includes equivalents for full-time or not
- Considering tips as qualified wages and interaction with credit of section 45B.
- Deduction of qualified wages deadline and whether the taxpayers who already filed an income tax return should amend the return after getting credit on an adjusted return on the employment tax return
- Whether the paid wages to the majority owners and their spouses would be considered qualified wages
How To Avail The Credit?
It is possible to claim the refundable credit ERTC when the qualified employers report their total qualified wages for each annual quarter on Form 941 of federal employment tax returns.
However, employers who wish to minimize the payroll deposits to anticipate the credit or want to get advance payment from the IRS can submit Form 7200. It means that the company prospectively can get tax credit early in the check format from the IRS.
Besides going through the dedicated page for claiming employee retention credit 2022, business owners can directly speak with the payroll company or tax advisor. It is necessary when you want to make the best use of your PPP funds.
ERTC is a great opportunity for W-2 wages business owners to obtain federal assistance. Qualified business owners must carefully consider and approach professional guidance from the payroll organization or tax returns preparer. Avoid availability of funds and start the process to avail mutual benefits. If you are facing any issues, feel free to reach out to us at Business Tax Benefits and get served effectively.