The COVID-19 pandemic has presented unprecedented challenges for employers, particularly when it comes to retaining their employees.
The ERTC (Employee Retention Tax Credit) was created as part of the CARES Act to provide financial support to eligible employers making tax planning for the following years, easier than before.
To be eligible for the credit, employers carrying a trade or business in 2022,must have experienced:
A suspension of operations and a decline in gross receipts.
In this post, we'll dive into the specifics of ERTC eligibility, so you can determine if your business qualifies for this valuable tax credit.
To be eligible for the ERTC, an employer must meet the following criteria, according to the Internal Revenue Service (IRS):
The exact definition of "carrying on a trade or business" can vary depending on the jurisdiction. It generally it refers to any activity that is carried out with the intent of making a profit.
The ERTC is available to employers of all sizes, including corporations, sole proprietorships, partnerships, and non-profit organizations.
Certain types of employers may be excluded, such as federal, state, and local government entities, and certain political organizations.
The employer must have been carrying on a trade or business during the calendar year 2022.
This term refers to any activity that is carried out with the intent of making a profit.
This can vary slightly depending on jurisdiction.
Being affected by orders that limit commerce, travel, or group meetings. To be eligible for the retention tax credit, the employer must also have experienced a significant decline in gross receipts.
Defined as less than 50% of what they were in the same calendar quarter of the prior year.
The ERTC tax credit provides a refundable tax credit of up to $7,000 per eligible employee per year.
The credit is calculated based on the amount of wages paid to each eligible employee and the decline in gross receipts experienced by your business.
The maximum credit amount is $7,000 per eligible employee per year, and the credit can be claimed for wages paid between January 1, 2022 and December 31, 2022.
It is important to note that the ERTC tax credit is not a one-time payment, but rather a tax credit that can be claimed on your business's federal tax return.
This means that if your business owes federal taxes, the ERTC tax credit can be used to offset those taxes, and if your business does not owe federal taxes, the credit can be claimed as a refund.
The ERC refund processing time may also vary depending on the backlog, if it was filed correctly, and what method you used to file.
It's important to note that the ERTC tax credits are available to employers of all sizes, including non-profit organizations.
However, certain types of employers may be excluded, such as federal, state, and local government entities, and certain political organizations.
Employers should consider this when determining their eligibility for the ERTC retention tax credit.
To claim the ERTC tax credit, you will need to complete Form 941 and attach Schedule R to your business's quarterly tax return.
In addition, you will need to provide documentation that demonstrates that your business meets the eligibility criteria and has experienced a significant decline in gross receipts.
One important aspect of ERTC eligibility is the definition of "qualified wages."
These are wages paid to an employee for time that the employee was not providing services due to the suspension of operations or decline in gross receipts.
Qualified wages also include health plan expenses that are allocable to these wages.
To be eligible for the ERTC, the employer MUST have paid these qualified wages to its employees during the period of decline.
Another important factor to consider is if you have (or not) taken a PPP Loan.
In terms of timing, the ERTC is available for wages paid after March 12, 2020, and before January 1, 2024.
The credit is equal to 50% of the qualified wages paid to employees during the suspension of operations or decline in gross receipts due to a government order, up to a maximum of $10,000 per employee per year.
It's important to note that the ERTC is a non-refundable tax credit, meaning that it can only reduce the employer's tax liability to zero.
If the credits exceed the employer's tax liability, the excess will not be refunded.
In order to be eligible for the ERTC's tax benefits and deductions, a business must meet certain criteria before applying.
The business must have experienced a full or partial suspension of operations due to COVID-19 or a significant decline in gross receipts backed with proven data (receipts and expenses).
The business applying for the tax credit must also have paid eligible wages to employees during the specified period. Eligible wages must have been reported on the employer's federal employment tax return.
The credits amount is based on a percentage of qualified employee wages paid to employees, up to a specified limit. You can also add PPP Loan information if you have taken any during said period.
The credits can be used to offset an employer's federal employment tax liability, including the employer's share of Social Security taxes.
To determine if a small business is eligible for the ERTC, it is important to review the guidelines provided by IRS before proceeding.
Information on the ERTC tax program can be found on the IRS website, including Frequently Asked Questions and Notice 2021-20.
It is also important to keep in mind that eligibility for the ERTC can be complex and can depend on various factors. This is why it may be helpful to consult with an ERTC tax specialist to ensure that your business is eligible for the credit and to accurately calculate the credit amount.
Please remember that there's a deadline for how long you can still claim the tax credit. The deadline and information can be found here: the ERTC Tax Credit Deadline 2022.