What is Employee Retention Tax Credit

More Details About ERTC

The ERTC is a refundable credit that businesses can claim on qualified wages paid to employees, including certain health insurance costs. The credit amount and eligibility criteria have changed with different legislative acts.

Under the Consolidated Appropriations Act – 2021, businesses could claim a credit against 70% of qualified wages paid, up to $10,000 per employee per quarter. The American Rescue Plan Act – 2021 maintained the credit at 70% of qualified wages, with a limit of $7,000 per employee per quarter. Recovery Startup Businesses (RSBs) could be eligible for a credit of up to $50,000 for the third and fourth quarters of 2021.

Businesses can retroactively claim the Employee Retention Tax Credit (ERTC) by conducting a lookback on their payroll during the pandemic and filing an amended tax return. The deadline for filing amended returns is April 15, 2024, for 2020 quarters and April 15, 2025, for 2021 quarters.

The credits are reconciled on Form 941, and any excess credit is refunded to the employer if it exceeds their total liability of Social Security or Medicare taxes.

To claim the ERTC retroactively, employers must file Form 941-X for the applicable quarter(s) in which the qualified wages were paid. IRS Notice 2021-20 provides guidance for employers, including those who received a PPP loan, on claiming the credit.

Employers qualify for the credit if they were partially or fully suspended or experienced a significant decline in gross receipts. The American Rescue Plan Act introduced a new category called Recovery Startup Business, which allows certain businesses to claim the credit.

Qualified wages include compensation subject to FICA taxes and certain health expenses paid after March 12, 2020, until Sept. 30, 2021 (Dec. 31, 2021, for RSBs). Tipped wages can be included if they meet certain criteria.

The interaction with other credits and funding sources should be considered. Employers cannot double-dip by claiming both the ERTC and the paid family medical leave credit. Work Opportunity Tax Credit and ERTC cannot be claimed for the same employee.

Certain payroll costs from the Shuttered Venue Operators Grant (SVOG) or Restaurant Revitalization Fund (RRF) cannot be considered as qualified wages for the ERTC in the third quarter of 2021 (except for Recovery Startups in the fourth quarter).

It’s important to review the IRS guidance and maintain accurate records to ensure eligibility and maximize the credit amount. You may also want to review  ERTC FAQs that previously were published on the IRS website.