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 Employee Retention Tax Credit (ERTC) was available as part of COVID-19 relief programs, but it officially ended on September 30, 2021, for most employers. However, businesses that were eligible for the ERTC during the period when it was active can still claim it retroactively by filing amended payroll tax returns.
Steps to Claim the ERTC:
- Review Eligibility: Ensure your business was eligible during the 2020 or 2021 periods for which you’re claiming the credit. It applies to businesses that were fully or partially suspended due to COVID-19 restrictions or experienced a significant decline in revenue.
- Amend Past Payroll Tax Returns: If you didn’t claim the credit previously, you can amend your Form 941 (Employer’s Quarterly Federal Tax Return) for the quarters in which you were eligible.
- File Form 941-X: Use Form 941-X to amend your payroll tax return for the eligible quarters.
- Submit Documentation: Ensure that all required documentation for qualifying wages and other necessary details is attached to the amended return.
- Consult a Tax Professional: Because retroactively claiming the ERTC can be complicated, it’s a good idea to work with a tax professional to make sure everything is filed correctly.
Important Considerations:
- No Double-Dipping: You cannot claim the ERTC for the same wages used to claim other tax credits (such as the Families First Coronavirus Relief Act tax credit).
- Deadline: While the credit itself has expired, you can still file retroactive claims for 2020 and 2021 as long as you file the amended return within three years of the original filing date.
If you are considering claiming the ERTC for any past eligible quarters, it’s important to act soon and ensure you comply with all the IRS guidelines.
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.
