Common Questions on Employee Retention Tax Credits
What is the ERTC Employee Retention Tax Credit and ERC?
The CARES Act's Employee Retention Credit is a fully refundable tax credit. For the 2020 program, the ERC is equal to 50% of qualified wages (including allocable qualified health plan expenses) that eligible employers pay their employees. This applies to wages paid after 3/12/2020 and before 1/1/2021. The maximum amount of wages taken into account with respect to each employee for all calendar quarters is $10,000, so that the maximum credit for an employee is $5,000.
For the 2021 program, the credit is increased to 70%, and the limit is $10,000 per quarter. This means the annual maximum for an employee is $28,000.
The tax credit offsets all withheld federal employment taxes including federal income tax withholding, Employer FICA and Medicare. Any excess credit will be refunded or advanced by the IRS.
What is an Eligible Employer?
Eligible Employers for the purposes of the Employee Retention Credit are those that carry on a trade or business during calendar years 2020/2021, including a tax-exempt organization, that either:
Fully or partially suspends operations by a governmental order, or
Experiences a significant decline in gross receipts during a calendar quarter when compared to 2019
When is the operation of a trade or business considered partially suspended for the ERC?
The operation of a trade or business may be partially suspended if an appropriate governmental authority imposes restrictions upon the business operations by limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes). This can be a "Stay at Home Order" for non-essential businesses, a capacity restriction, or other possibilities.
Are the ERC and ERTC the same thing?
Yes, ERC stands for 'Employee Retention Credit', also known as the ERTC 'Employee Retention Tax Credit. This program was created by the Coronavirus Aid and Relief Act in 2020 to help businesses keep employees on their payroll. Both Employee Retention Tax Credit (ERTC) and Employee Retention Credits are refundable tax credits.
What are qualified wages?
Qualified wages are compensation provided to employees during an eligible period. An eligible period is either:
a) the time during which the trade or business is fully or partially suspended by governmental order, or
b) for 2020, any calendar quarter during which gross receipts are 50% less than the amount received during the same quarter of 2019; for 2021, any calendar quarter during which gross receipts are 20% less than the same quarter of 2019.
How will I use a tax credit?
This program is not an "income tax credit" and not related to your annual business tax returns or your profit/loss from the business. Although it is called a tax credit, it is most frequently received as a cash payment from the IRS. You may also use it to offset future payroll tax payments.
Is there a deadline to apply?
The Employee Retention Credit is accessed by filing a 941-X Amended Quarterly Payroll Tax return. The IRS will accept these for up to three years after the initial filing, so the ability to participate in ERC program may continue into the end of 2024.
How much does it cost?
The initial analysis to determine your eligibility and approximate credit is completely free. If you file for an ERC with us, our fee is a percentage of the credit to be received.
Doesn’t my payroll system/CPA have this information?
Like most economic development business tax incentive programs, the Employee Retention Credit has certain complexities that may impact receiving an accurate, optimized, and audit-ready number. It is important to fully document processes and procedures, organize your records, and avoid any risk areas in advance of a potential IRS audit of the claim, which may come years later.
The ERC has numerous issues such as Controlled Group criteria, documenting qualification methodology, coordination with PPP loans, allocating healthcare expenses to the appropriate time periods, etc. Your payroll company does not have all this information, and your CPA may not have the specific expertise to ask.
The use of ERC specialists can help prevent disaster and/or leaving money "on the table".
What if I own multiple businesses?
Perhaps the most complicated aspect of the ERC program, separate businesses under common ownership that meet IRS Controlled Group criteria must be evaluated together for eligibility. If the tests are passes, all entities are eligible; if not, none are eligible. The ERC is then calculated and filed for each separately.