What Every Business Owner Should Know About Employee Retention Tax Credit

  • July 1, 2021

Paying and supporting your employees is one of your responsibilities as a business owner. However, with the Covid-19 pandemic, it has become difficult to do that. The Employee Retention Tax Credit (ERTC) was introduced to assist small businesses affected by the pandemic. The ERTC gives struggling businesses the financial assistance they need to keep operating during the pandemic and helps with small business profitability.

Here's what you should know about ERTC.

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What is employee retention tax credit (ERTC)?

The employee retention tax credit is an incentive created within the Aid, Relief, and Economic Security Relief Act (CARES act) to help business owners keep their employees on the payroll while dealing with the Covid-19 pandemic effects. If you are eligible for ERTC, you'll get a refundable tax credit that is equal to a percentage of the eligible wages.

Initially, business owners were unable to get a PPP loan and still claim the ERTC. Employers are now able to claim the ERTC even if they have a PPP loan, thanks to the consolidated Appropriations Act. By 2021, employers who qualify get a credit of up to 70 percent of wages per quarter. The maximum credit you can get per quarter is $7,000 per employee. That equals $28,000 per employee for the four quarters of 2021.

Who is eligible for ERTC?

ERTC is a program that helps small businesses that lost revenue during the Covid-19 pandemic. The program assists small business profitability recovery. However, not all companies are eligible for the program. Any non-profit and for-profit business that was operational in the year 2020 is eligible for ERTC. There are two conditions that businesses must meet to qualify for the program. If you have been actively carrying on business in 2020 or 2021 and meet the following tests, you are eligible for ERTC.

Government order test

If you have a calendar quarter where your business operations were suspended due to an appropriate government authority order limiting group meetings or travel due to the pandemic, then you are eligible for ERTC. You suspended your operations due to government orders or the pandemic's effects.

A decline in your gross receipts

If you have experienced a decline in your gross receipts, you are eligible for ERTC. Your gross receipts fell by 50% for a single quarter of 2020 versus that same quarter in 2019. Or if your gross receipts for a single quarter in 2021 were reduced by 20%.

If you have a decline in gross receipts that's more than 20% during any quarter in 2020, then you qualify.

If your company had fewer than 500 employees as of December 2020, you can participate in the program. The employee retention tax credit applies to all qualified wages. That includes the health plan benefits that were paid in the year in which business operations were interrupted. An accounting advisor can help you determine your eligibility.

Eligible wages under Employee Retention Tax Credit

For a small employer, health insurance benefits and all wages are eligible for the program. Eligible wages are only incurred when an employer is eligible. Therefore, if the employer does not meet the eligibility criteria, they will not have eligible wages.

The wages that qualify depend on the number of employees you have. If you had 100 or fewer employees in 2019, then the wages and healthcare costs qualify. The claim per employee can go up to $10,000, even if the employee did not provide their services during the pandemic period.

If you are a small employer, your eligible wages include all the health insurance benefits that you pay to an employee during the period they work for you. Other eligible wages are commissions, tips, and salaries. Any compensation subject to FICA tax also qualifies for the program.

Does every business owner qualify?

There are several reasons you may not be eligible for the employee retention credit. Here are some of the reasons.

  • You got a business interruption loan under the PPP.
  • You were allowed a work opportunity tax credit.

Should you apply for the employee retention program?

Taking advantage of the retention credit will give your business much-needed support for small business profitability during these tough times. You can get help from an accounting advisor on how to apply for the program.

How do you claim the ERTC?

You report the ERTC on Form 941 because it's a payroll tax credit. You can claim your ERTC by reducing the employment tax deposits before filing your quarterly employment tax returns. Use IRS form 7200 to request an advance payment. If the tax credit is more than your tax liability, you'll get a refund of the excess amount. In the event that you don't know how to go about it, a part-time CFO can be of help.

If you need business advisory services or small business profitability advising, contact us for analysis and help.

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