What is the Employee Retention Tax Credit (ERTC) & How Do You Claim It?

The pandemic has hit small businesses hard over the past couple of years, and the government has tried to find solutions and assistance to keep companies afloat.

One such solution is the ERTC, also referred to as the employee retention credit (ERC). Established through the Coronavirus Aid, Relief, and Economic Security (CARES) Act as a refundable payroll tax credit, it is designed to help reimburse businesses for the wages and health insurance they paid employees during 2020 and 2021. The goal is to reward companies for keeping their staff employed during this challenging time despite bringing in less revenue.

However, due to the Infrastructure Investment and Jobs Act, the ERC technically ended at the end of Q3 (September 30th) 2021. But, the good news is that there’s still time to cash in on its benefits.

Read More: 5 Ways to Increase Employee Retention

How Do I Know If My Business is Eligible?

First, you must be a private business or tax-exempt organization that conducts a trade or business. As of 2021, this includes public colleges or universities, medical or hospital care organizations, and certain institutions, such as federal credit unions.

Next, your business must have been forced to cease or limit operations due to a government order and/or had a significant decline in gross receipts of at least 50% (for 2020, beginning March 12th) or 20% (for 2021, Q1-Q3) versus the same quarter in 2019.

To be eligible for Q4 of 2021, you must qualify as a Recovery Startup Business, a business started after February 15, 2020, and have gross receipts under $1 million.

If you started your business in 2020, you can use 2020 as your comparison year instead of 2019.

How Much Credit Can I Get?

For the 2020 tax year, the maximum credit a business can receive is $5,000 per employee. For 2021, the maximum is $21,000 per employee. So in total, companies can claim up to $26,000 per employee.

To figure out how much your company can get, first determine the total amount of qualified wages paid to each full-time employee per quarter. Qualified wages include all forms of wages that are subject to FICA taxes, as well as qualified health plan expenses.

For 2020:

• If you had over 100 full-time employees, only claim wages of employees who were paid but didn’t work
• If you had 100 or fewer employees, claim everyone
• Cap off qualified wages at $10,000 per employee per year
• Claim back 50% of all qualified wages paid per employee
• Maximum per employee per year: $5,000

For 2021:

• If you had over 500 full-time employees, only claim wages of employees who were paid but didn’t work
• If you had 500 or fewer employees, claim everyone
• Cap off qualified wages at $10,000 per employee per quarter
• Claim back 70% of all qualified wages paid per employee
• Maximum per employee per year: $21,000 ($7,000 per quarter)

How Do I Get Credit for 2020 & 2021 When I Already Filed Those Taxes?

Even though ERC ended in 2021, you can still retroactively file Form 941-X, the Adjusted Employers’ Quarterly Federal Tax Return, to get your tax credits. The IRS gives you up to three years after the initial filing date to adjust.

Read More: 30 Employee Perk Ideas to Attract and Retain Employees

What Are the Exceptions?

When calculating qualified payroll wages, you cannot include wages from:

• Paycheck Protection Program (PPP) loan forgiveness
• Families First Coronavirus Response Act (FFCRA)
• American Rescue Plan Act of 2021 Paid Leave Tax Credits 
• Work Opportunity Tax Credit (WOTC) 
• Research and Development Credit (R&D) 
• Employees that are family members of the owner
• Employees that own 50% or more of the company
• A grantor, beneficiary, or fiduciary of the employer

Let Us Do the Hard Work for You

We understand that taxes and payroll calculations are complicated and time-consuming, but we’re here to help. If you’re still not comfortable applying for ERC, pass the responsibility to us. Nexus HR payroll services can help you with your quarterly and annual tax filings so you can concentrate on the parts of your business only you can do. Reach out to us today for a free quote.

Note: This blog is not intended as expert tax advice. Please consult a licensed professional for guidance on your specific business and situation.