What is the Employee Tax Credit?

The Employee Retention Tax Credit was rolled out as part of the CARES (Coronavirus Aid, Relief, and Economic Security) Act.  However, the credit expired in 2021, and employers can no longer claim the ERTC for wages paid in 2025. Below is an overview of the program, including eligibility requirements and procedures that applied during its availability. For businesses that may still have claims for previous years (2020-2021), it’s crucial to understand how to properly apply the credit for those periods.

What is the Employee Retention Tax Credit?

The ERTC was a refundable tax credit meant to incentivize employers to retain employees during the pandemic by offsetting payroll taxes. Employers could claim up to 50% of qualified wages paid to employees, up to $10,000 per employee in 2020. In 2021, the credit increased to 70% of qualified wages up to $10,000 per quarter, resulting in a maximum credit of $28,000 per employee.

What Made Someone Eligible for the Employee Retention Tax Credit?

Eligibility for the ERTC depended on several factors:

• Full or Partial Suspension: Employers must have been fully or partially suspended by a government order due to the COVID-19 pandemic.
• Decline in Gross Receipts: Employers could qualify if they experienced a significant decline in gross receipts — more than 50% in 2020 and more than 20% in 2021 compared to the same quarter in 2019.
• Recovery Startup Businesses: New businesses established after February 15, 2020 that began operations after that date and were affected by COVID-19 restrictions qualified for a limited ERTC for the third and fourth quarters of 2021.

Employers with fewer than 100 employees could receive the credit for all employees, while employers with more than 100 employees could only claim the credit for employees who were paid but not working due to the pandemic.

Eligibility Criteria:

To qualify for the ERC, businesses and tax-exempt organizations must meet specific eligibility criteria. Generally, eligible employers are those that:

• Were shut down by a government order due to the COVID-19 pandemic during 2020 or the first three calendar quarters of 2021.
• Experienced a significant decline in gross receipts during the eligibility periods in 2020 or the first three calendar quarters of 2021.
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

Additionally, eligible employers must have paid qualified wages to claim the credit.

How can I claim the Employee Retention Tax Credit?

The ERTC cannot be combined with any other tax credit. If you are counting wages toward the Families First Coronavirus Relief Act tax credit, you cannot count those same wages toward the ERTC.

To begin your ERTC claim, employers should report their total qualified wages and other credits on a quarterly basis. Form 941 allows businesses to report their income, along with their Social Security and Medicare taxes withheld from employee’s paychecks. 

If an employer reduces the amount of payroll taxes they withhold from employee’s wages, they can be immediately reimbursed. 

As businesses continue to adjust their business plans in the face of coronavirus, there are many ways they can find relief through various programs. The ERTC is a good option for employers who are trying to keep their employees on their payroll. Visit our COVID-19 resource page for more information on programs that can benefit your business.

Penalty Relief:

If a business mistakenly claimed the ERTC or failed to meet the eligibility criteria, there are penalty relief provisions in place. Employers should review their claims and consult with tax professionals to rectify errors without facing unnecessary penalties.

Reporting Tax-Related Illegal Activities:

The IRS encourages individuals to report tax-related illegal activities, including fraudulent claims for the ERTC, promotion of false information, and abuse of tax schemes. This ensures the integrity of the program and protects taxpayers from potential fraud.

Beware of ERC Scams:

While the ERTC offers substantial relief, businesses should be cautious of scams. Fraudulent marketing tactics, unsolicited offers, and promises of quick refunds should be treated with suspicion. It’s essential to verify the legitimacy of offers and work with reputable sources when claiming the ERTC.

Final Notes

The Employee Retention Tax Credit continues to offer valuable financial support to businesses and tax-exempt organizations. By understanding the eligibility criteria, the claiming process, and the compliance requirements, eligible entities can use the ERTC to alleviate financial challenges and retain their workforce.

However, businesses should exercise caution to avoid falling victim to fraudulent claims or misunderstandings. For more information and guidance on the ERTC, consult with a qualified tax professional.

For further details on eligibility, reporting mechanisms, and FAQs about the ERTC, visit the IRS official website.