One of the programs the government put into place to aid businesses through the pandemic is the Employee Retention Tax Credit (ERTC), which has seen multiple amendments over time. The ERTC provides a refundable tax credit on qualified wages, including certain health insurance costs to small businesses who have seen a decline in gross receipts or had a temporary closure due to government mandates.
At this time, the ERTC is set to expire on December 31, 2021. However, pending legislation includes a curtailment of the ERTC, which would mean it expires at the end of Q3 (September 30, 2021). Although we generally avoid speculating about Congressional activities, we are recommending that businesses that are eligible for the ERTC act fast to take advantage of the credit, just in case.
Here’s what you need to know now to take advantage of the ERTC.
August 2021 ERTC Eligibility Changes
The basic qualifications for businesses to claim the ERTC are fairly broad. In early August, the Internal Revenue Service (IRS) released further guidance and inclusions intended to assist even more businesses through the pandemic.
One of the most notable changes impacts wages paid to business owners. If a majority owner has any living family members (other than a spouse), wages paid to the owner aren’t eligible for the credit. However, if the majority owner has no living blood relatives, then the owner’s wages are eligible.
Recent guidance also includes recovery startup businesses as eligible for the ERTC. The IRS defines a recovery startup business as an employer that began carrying on any trade or business after February 15, 2020, for which the average annual gross receipts of the employer for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000, and that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts.
The IRS also provided further clarification for those businesses that received a Shuttered Venue Operators Grant, Restaurant Revitalization Fund grant, or whose PPP loan was forgiven. Under IRS guidance, a business may exclude the amount of PPP loan forgiven from their gross receipts (exclusively to determine ERTC eligibility).
How to Claim the ERTC
When determining qualifying wages, businesses should include wages/compensation that are subject to FICA taxes, including tips. These must have been paid after March 12, 2020, (for retroactive credit) and qualify if paid through December 31, 2021, (as of September 8, 2021).
The credit can only be taken on wages that have not or are not expected to be forgiven under PPP. Qualified health insurance costs generally include employee and employer pre tax portions.
- Employers should claim the ERTC when filing quarterly taxes using Form 941 Employer’s Quarterly Federal Tax Return.
- If a business does not have sufficient funds to cover the credit, use Form 7200 Advance Payment of Employer Credits Due to COVID-19 to request an advance payment of employer credits.
- In order to retroactively claim the ERTC, due to the IRS allowing businesses to utilize both the PPP and ERTC, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
As with most tax credits, the ERTC sounds lucrative at first blush, but turns out to be a fairly complex credit to claim correctly. We strongly recommend consulting with a qualified CPA to ensure you are leveraging all of the aid available to you through the variety of pandemic relief programs. Taking action soon could mean cash back in your business. Contact us to schedule a consultation.