The Definitive Guide to The Employee Retention Tax Credit (ERTC)
October 17, 2022 | Last Updated on: January 31, 2023
October 17, 2022 | Last Updated on: January 31, 2023
After businesses were forced to suspend operations during the COVID-19 shutdowns of 2020, the U.S. Congress initiated a financial assistance program to help small businesses.
The Employee Retention Tax Credit (ERTC) provided eligible employers payroll tax credits for wages and health insurance paid to employees.
Although the Infrastructure Investment and Jobs Act that was signed into law in November 2021 put an end to the Employee Retention Credit (ERC) program, businesses still have the opportunity to claim ERC for up to three years retroactively. Businesses also have five years to amend their tax returns to claim the ERTC.
Originally available from March 13, 2020, through the end of 2020, the ERTC is a refundable payroll tax credit created as part of the CARES Act, a $2.2 trillion economic stimulus bill passed by Congress and signed into law by President Donald Trump in response to the economic impact of COVID.
The ERTC was created to encourage employers to retain their employees on payroll during the pandemic. Employers who qualified for the credit and borrowers who took out a Paycheck Protection Program (PPP) loan could claim up to 50% of qualified wages, including eligible health plan expenses. The Consolidated Appropriations Act (CAA) expanded the ERTC. Employers who qualified in 2021 can claim a credit of 70% in qualified wages.
Most types of businesses, except for self-employed individuals and government employers, are eligible for the ERTC.
To qualify for 2020, an applicant must have operated a business or a tax-exempt organization that was partially or fully shut down as a result of the Coronavirus pandemic. To be eligible, the applicant also is required to prove that he or she experienced a significant decline in sales: a falloff of 50% or more in comparable gross receipts compared to the previous year.
An applicant who is inquiring about being eligible for 2021 must be able to prove that he endured a decline in gross receipts by 80% compared to the same time period in 2019. Someone who was not in business in 2019 could instead compare her gross receipts to 2020.
An alternative calculation for a significant decline in receipts in 2021 permits small business owners to use the receipts in the previous quarter compared to that same period in 2019.
As of Jan. 1, 2021, the definition of qualified wages was changed so that:
1) An employer that averaged more than 500 full-time employees in 2019 could be provided for. This allowed small business owners more latitude for whom they could claim for the credit. Qualified wages are payments to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts. Any wages that are subject to FICA taxes qualify, and you can include qualified health expenses when calculating the tax credit.
2) An employer that averaged 500 or fewer full-time employees in 2019 could be provided for. Qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.
3) If a business has fewer than 100 employees, all employees are eligible. If a business has more than 100 employees, only workers who are being paid but not providing a service due to cutbacks related to COVID are eligible.
Recovery startup businesses must claim the credit through the end of 2021.
The end of the program in 2021 does not mean the end of a small company’s opportunity to claim the ERTC. A business owner would claim this tax credit by filling out Form 941 when filing federal tax returns.
Eligible entities are for-profit businesses and nonprofits that operated during 2020 or 2021 and meet either the government order test or the reduced gross receipts test. The Government Order Test is a measurement of whether eligible employers had a calendar quarter where business operations were partially suspended or halted completely because of a federal government mandate. This test primarily applies to small business owners that experienced a decrease or a cessation of business due to limited commerce and travel due to partial suspension. Employers who were ordered to cancel or postpone group meetings for commercial, social or religious reasons during the pandemic also “pass” the “Government Order Test.”
As for the “Reduced Gross Receipts Test,” eligibility for the ERTC can also be enhanced by a significant fall-off in gross receipts. To qualify for 2020, the applicant must have operated a business or a tax-exempt organization that was partially or fully shut down as a result of the pandemic. To be eligible, the applicant also is required to prove that he or she experienced a significant decline in sales: a drop of 50% or more comparable gross receipts compared to the previous year.
The ERTC is a fully refundable tax credit. The maximum amount of qualified wages that can be claimed is $10,000. The maximum credit for any one employee is $5,000.
The Employee Retention Tax Credit does encompass new business startups, if those businesses were launched before Feb. 15, 2020. But to meet the eligibility requirements, the company’s gross yearly revenue must fall below $1 million.
This income must have been paid between March 13, 2020, and September 30, 2021. However, recovery startup businesses have to claim the credit through the end of 2021.
Recovery startup businesses are not required to meet the revenue decline or government shutdown requirements. Startups were denied many COVID-19 funding streams, including the Paycheck Protection Program and the Economic Injury Disaster Loans (EIDLs). Small employers–those with 500 or fewer employees, including tax-exempt organizations under IRC Section 501 (a) and (c)–are eligible for the recovery startup provision.
Eligible businesses may claim up to $50,000 per quarter for a total yearly benefit of up to $100,000. Each quarter’s tax credit equals 70% of eligible employees’ wages, up to $10,000 per employee per quarter.
Some small businesses do not take advantage of the ERTC because they have misunderstood the admittedly complex rules about who is and is not eligible.
1) Lack of significant revenue decline: Some businesses without a substantial revenue decline can still qualify for the employee retention tax credit.
2) Thinking that an unessential business doesn’t qualify: A company is not required to be considered “essential” to qualify for the credit.
3) Belief that a previous PPP loan disqualifies a business: If a company has received a Paycheck Protection Program funding, it may still be eligible for the ERTC. The employer can claim on qualified wages that are not counted as payroll costs in obtaining PPP loan forgiveness.
4) If one’s business never shut down, is it still eligible? There are several provisions in the ERTC program that could enable an employer to qualify for it even if he did not completely suspend operations during the pandemic. A small business that was forced to partially shut down can make a claim. A business that did not receive a mandate from the government to shut down can still qualify by showing a decline in revenue.
Eligible wages paid to each individual employee in 2020 that may be used to calculate the ERTC for all calendar quarters must not exceed $10,000. An employer is permitted a maximum $5,000 ($10,000 x 50%) credit per employee for all calendar quarters in which eligible wages are paid.
In 2021, eligible wages paid to each individual employee that may be used to calculate the ERTC cannot exceed $10,000 per each quarter. An employer is permitted a maximum $7,000 ($10,000 x 70%) credit per employee for each calendar quarter in which eligible wages are paid. Any eligible wages that go into calculating the allowable ERTC cannot be considered as wages for purposes of various other tax credits and PPP loan forgiveness.
The Internal Revenue Service (IRS) states that eligible employers can get immediate access to the Employee Retention Tax Credit (ERTC) by reducing employment tax deposits that they are otherwise required to make. If the business owner’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS. To apply,
1) Gather all relevant data on your small business, including its legal name, legal address and the employees’ numbers.
2) Compile payroll data. Pay will be credited to employees who qualify for the ERTC. If a one-time employee has left the company, an employer must figure out when the worker left the company.
3) Collect all PPP loan documents. This would include the date when the PPP loan was granted and the amount of the PPP loan. Then an employer can calculate how many ERCs can be secured using any documents from PPP loans.
4) Compile sales revenue data for the year(s) in question. The net income or loss and the amount of full-time employees in a company directly impact the amount of the ERTC computation.
Although PPP loans are no longer available, eligible business owners whose companies were affected by COVID-19 can still access ERTC loans. The funds are issued by a bank or online lender, like Biz2Credit, and repayment schedules are arranged directly with the lender. A small business owner who is eligible to receive ERTC can contact a lender to discuss your loan options.
An Economic Injury Disaster Loan (EIDL) is available to small businesses, small agricultural cooperatives and most private nonprofit organizations. “Substantial economic injury” is defined by a company that cannot to meet its obligations and pay its “ordinary and necessary operating expenses.” EIDLs supply needed working capital to assist small businesses until normal operations resume following a catastrophic occurrence.
The Small Business Administration (SBA) can provide up to $2 million to help meet financial obligations and operating expenses that could have been met had the disaster not occurred. The amount of the business loan is based on a company’s economic injury and its financial needs. The repayment term will be determined by your ability to repay the loan.
The U.S. Congress introduced legislation called the Restaurant Revitalization Fund (RRF) to help restaurants recover from the impact of COVID on their business. But demand for the funds greatly exceeded the supply of funds, so the SBA closed the program and stopped accepting applications on July 2, 2021. Less than 10 days after the SBA launched the RRF Portal, the applications submitted equated to more than twice the amount of funds available. Any assistance provided through this program to applicants before it was shut down does not need to be repaid if the funds are used for eligible expenses by March 11, 2023.
The Shuttered Venue Operators Grant (SVOG) provides emergency assistance for eligible venues that have been affected by the pandemic. The SVOG is no longer accepting new applications. The SVOG portal remains open to all active applicants and awardees.
The ERTC is only a one-time program and won’t be available for very long for many businesses. So it can be a good idea to understand some of the financing options that exist outside of this or other government-sponsored programs.
Other types of financing available for small businesses include:
A term loan is a traditional type of small business financing where the borrower receives an approved amount of money upfront and repays the loan with monthly payments of principal and interest. A loan with a relatively quick repayment period, a short-term loan is one in which the borrower receives cash in a lump sum up front, then repays the loan, often with some substantial financing rates. Some short-term loans permit the borrower to make extra payments to pay it off sooner. However, some short-term loans actually come with penalties for early repayment. Short-term loans generally have a term of 12 months or less.
A business line of credit can be approved in as little as 24 hours or less. Depending on the lender, you might only need a credit score of 500 to qualify for a business line of credit.
When a lender provides pre-approved funding with a maximum credit limit, that is known as a business line of credit. If the borrower is approved for this line of credit, funds can be accessed whenever they are needed until the established credit limit has been reached.
Because the borrower is only paying interest on the amount that he or she withdraws, a business line of credit can be a good fit for business owners who are uncertain of the amount of funding they will require, or when they might need it.
The drawback to a business line of credit is that the loan will be at a rate that might be considerably higher than other types of loans.
With a merchant cash advance, a company grants the borrower quick access to cash. The borrower is then required to pay a portion of his or her sales made with credit and debit cards, as well as an additional fee. A merchant cash advance does not require collateral or a minimum credit score. A merchant cash advance can be an expedient way for a business owner to get his hands on capital when the need for cash becomes extremely pressing. A business owner might be slammed with a bill he or she did not expect, or the owner might need the cash fast in order to consummate a time-sensitive deal that must be decided upon sooner rather than later.
With a merchant cash advance, a business owner can potentially get hold of a large sum of funding in a hurry. The turnaround could be realized in as little as 24 to 48 hours in some cases.
If you are eligible, employee retention tax credit loans may be a great option for small businesses that were impacted by the pandemic during 2020 and 2021. The proceeds from these loans are intended to help business owners continue to pay their employees, despite a significant decline in income. Whether or not you are eligible for an ERTC loan, consider contacting Biz2Credit to explore financing options.