What Is Employee Retention Tax Credit? How Do Employee Retention Tax Credits work?

written bySteven Jackson
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Employee Retention Tax Credit, created as a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES) in March 2020, is a generous incentive program to help businesses make it through the unprecedented impact of COVID 19. And through ERTC, businesses of any size can get up to $26,000 per employee.

Did you know? Your business could be eligible too, and you can still claim for this program retroactively, so take full advantage of the ERTC program now. If you are unaware of this program, here’s everything you need to know.

Employee Retention Tax Credit (ERTC): Everything You Need To Know

The Employee Retention Tax Credit (ERTC) is an Internal Revenue Service (IRS) tax credit program designed to help and encourage companies and small businesses to retain their employees on payroll during the coronavirus pandemic. In other words, ERTC is a fully refundable payroll tax credit on qualified wages paid to employees from March 13, 2020, to December 31, 2021.   This tax credit program is available for all eligible businesses regardless of their size, including restaurants, colleges, hospitals, event organizing companies, staffing companies, non-profit organizations, startups, and any sort of brick-and-mortar business. Through this credit, employers can offset federal payroll taxes such as federal income tax withholding, Medicare taxes, and employees’ share of social security. For more information on ERTC visit https://www.koolonlineitems.com/ERCT

A Quick Overview of ERTC

As we know, this program was initiated to help employers during the emergency period in 2020. However, as the pandemic dragged on for months, ERTC was later extended and revised twice to help as many employers as possible.   In 2020, the tax credit was worth 50% of qualified employee wages paid or claimed for up to $10,000 per employee annually between March 13, 2020, and December 31, 2021. So it granted a maximum tax credit of $5,000 per employee in 2020.

Changes BY CAA

In December 2020, Congress revised this program through the Consolidated Appropriations Act (CAA). According to the CAA Act:  

●Eligible employers, including those that receive a Paycheck Protection Program (PPP) loan, can claim a credit against 70% of the qualified employee wages paid.

●The wage limit for the tax credit was increased from $10.000 per year to $10,000 per quarter. So it means you can get an incentive as high as $7,000 per quarter per employee.

●The size eligibility of businesses also increased from the maximum limit of 100 employees to 500 employees. So, possibly many mid-size businesses can benefit.

Changes by ARPA 

Again the program was revised one more time through the American Rescue Plan Act (ARPA) of 2021. This extended the ERTC through the end of 2021 and helped many employers through its recovery startup business and severely financially distressed employers provision.  

A recovery startup business generally is any business that started operating after February 15 of 2020, and has an average annual gross receipt of no more than $1 million. In addition, these businesses can claim the tax credit without any suspended operations or reduced gross receipts. However, these businesses can only claim a credit of up to $50,000 for the third and fourth quarters of 2021.

●A business qualifies under severely distressed employers if it has less than a 10% gross receipt for the year 2021 compared to the same period in 2019. Under this category, eligible employers can count any wages paid to an employee during any quarter as qualified wages, irrespective of size.

●2020 - up to $5,000 per W-2 employee or 50% of qualified employee wages


●2021 - up to $7,000 per quarter per W-2 employee or 70% of qualified employee wages  

Who Is Eligible for ERTC?

As said, most private businesses and small businesses qualify for the scheme— however, two conditions determine whether your business qualifies for this tax credit program or not.   Full/Partial Suspension Test: If your business was either fully or partially suspended by the federal, state, or local government lockdown order that limited commerce, travel, or group meetings due to COVID-19. In such cases, the credit applies only for the portion of the quarter your business was suspended.Gross Receipts Test: If your business experienced a significant decline in gross receipts.  

●For 2020, a decline of at least 50% in gross receipts during any quarter of 2020, compared to the same quarter in 2019.

●For 2021, a decline of at least 20% in any quarter in 2021, through September 30, 2021, compared to the same quarter in 2019.   In addition to these conditions, your PPP status and the company size also count.   PPP Status: Originally, under the CARES Act, you cannot claim ERTC if you are on PPP, but with CAA and ARPA, you get to enjoy the benefit of both PPP and ERTC. However, you cannot use wages applied to the ERTC toward the forgiveness of a PPP loan. Also, note that you will be held responsible if found “double-dipping.” So make sure to take special care when you claim both ERTC and PPC.   Company Size: Your business must have a minimum of at least 2 employees to a maximum of 500 employees to become eligible for the ERTC program. For additional information please review this site https://www.koolonlineitems.com/ERCT  and see how you qualify.  

Who Is Not Eligible?

If you do not qualify based on any of the above conditions you cannot claim the Employee Retention Tax Credit. There are also other circumstances that prevent you from being eligible to claim ERTC.  

●If you are a recipient of the Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.

●If you receive a Small Business Interruption Loan under the Pay check Protection Program, authorized under the CARES Act.

●Wages for this tax credit do not include wages for which you received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.

●Wages for this tax credit also do not count for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.

How To Claim ERTC?

If your business is eligible, you can claim ERTC by filing Form 941, reporting your total qualified wages and the related health insurance costs for each quarter. The credit is taken against the employer’s share of Social Security tax, but for wages paid after June 30, 2021, the credit is taken against Medicare taxes. If the credit exceeds the employer’s total liability of the portion of Social Security or Medicare, the excess will be refunded to the employer under normal procedures. You can also request an advance of the Employee Retention Credit by filing Form 7200.  

If you are an eligible business, you can claim a retroactive ERTC refund by filing Form 941-X (Adjusted Employer’s Quarterly Federal Tax Return). The IRS allows a maximum limitation period of up to 3 years after the initial date of filing, during which the business is allowed to file Form 941-X to adjust the previous filings.

Documents You Will Need:

1.Payroll summary for each quarter from 2019 through 2021, highlighting each employee.

2.PPP loan forgiveness information.

3.Quarterly 941 tax filings for each quarter of 2020 and 2021.  

Also, note that your accounting company may need more information.  

So no doubt, the Employee Retention Tax Credit is a highly beneficial incentive to small and mid-size businesses. However, the amount of ERTC you will receive depends on various factors depending upon your business model, number of employees, time period, and other factors. Another benefit to your business could be business financing. Our business financing blog has really great resources for business funding especially unsecured business funding in tons of funding categories. If interested click on the link https://thepeoplesdepot.com/blog/business-loans to get more information.