Employee Retention Tax Credit Update
The Employee Retention Tax Credit (or ERTC) was part of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) enacted in 2020 by the U.S. government to incentivize businesses hit by the COVID-19 pandemic to retain their employees and keep paying their salaries.
Many businesses took advantage of this opportunity and continued to employ their employees throughout the waves of the pandemic. The ERTC was extended into 2021 and expired on November 15, 2021.
However, businesses can still amend their taxes for 2020 and 2021 to retroactively claim the Employee Retention Tax Credit.
ERTC Update: Current Status of the Employee Retention Tax Credit
The Employee Retention Tax Credit expired on November 15, 2021, when President Joe Biden signed the Infrastructure Investment and Jobs Act. This Act retroactively removed an employer’s ability to claim the ERTC for the last quarter of 2021. The Act only permitted the ERTC to be claimed in 2021 until the end of September.
Businesses can still retroactively apply for the ERTC based on qualifying wages paid to their employees from March 13, 2020, to September 30, 2021. If your clients are eligible employers, they can file an adjusted quarterly return – Form 941-X, or the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
The tax laws are complicated. Law firms can help assess their clients’ situations to see if the ERTC is available. Businesses have until 2024 to amend their 2020 and 2021 tax returns and claim the ERTC if they qualify.
ERTC Update: IRS Warning
On October 19, 2022, the IRS warned employers to be cautious of “third parties” who advise them to claim the ERTC when in reality, employers do not qualify for it. These suspicious companies are charging very high fees or a fee contingent on the refund. The IRS advised businesses to be wary of advertisements and solicitation that seem “too good to be true.” If a business has tax returns filed erroneously, they will have to repay any money and incur any penalties and interest.
As law firms, you should take this opportunity to warn your business clients to work with a reputable firm to claim the ERTC. It is also important to discuss the Employee Retention Tax Credit to see if they qualify
Criteria for Employee Retention Tax Credit
Businesses might not know they can retroactively take advantage of the ERTC. It is essential to inform your clients of the option as it may be a much-needed financial benefit for them after these difficult few years.
The following are the criteria a business (the employer) must meet to be eligible for the ERTC:
Qualifying Business Definition
This section will define a qualified business. The definition varies slightly between the 2020 and 2021 tax years, as amendments were made to the CARES Act.
There are two ways to reach the definition of a “qualified employer.”
Suspension of Trade
The employer’s operations must have been fully or partially suspended during a quarter of the year due to COVID-19 measures enacted by the government to stop the spread of the virus.
A Decline in Gross Receipts
If a business experienced a significant decline in gross receipts in a calendar quarter, they are also considered qualified employers. The period where the employer is considered qualified begins in the quarter where its gross receipts were less than 50% of the gross receipts for the same quarter in 2019 and ends in the next quarter where gross receipts were more than 80% of gross receipts for the same quarter in 2019.
The Consolidated Appropriations Act of 2021 changed the criteria for an employer to be considered qualified. For the decline in gross receipts qualifier, the decline was revised to when the employer’s gross receipts were 80% less than the gross receipts in the same quarter in 2019.
The American Rescue Plan 2021, another COVID-19 legislation enacted to rebuild the economy, added a third way for employers to be considered qualified. Dubbed a recovery startup business, employers in this category must have begun operations before February 15, 2020, have annual gross receipts under $1 million for the prior three taxable periods, and do not meet the other criteria.
After September 2021, only businesses designated as recovery startup businesses can claim the ERTC for the fourth quarter of 2021. Also, the last requirement of not meeting the other criteria was dropped.
Qualifying wages refer to expenses paid by the employer to its employees. Note that only wages paid to salaries employees qualify. Wages to independent contractors do not qualify under the ERTC.
Again, note that the rules differ regarding the 2020 and 2021 tax years.
If a business had 100 full-time employees or less in 2019, then any wages paid when the business was providing services and when it was not providing services are regarded as “qualified wages.”
If a business had more than 100 full-time employees in 2019, then wages paid only when the business was not providing services are regarded as “qualified wages.”
Fifty percent of these qualified wages are considered the credit amount, with a cap of $10,000 per employee per year. This includes health care expenses.
An amendment was made by the Consolidated Appropriations Act 2021. If the business had more than 500 full-time employees on the payroll, wages paid are “qualified” wages for the time the business is not providing services. If the business had less than 500 full-time employees in 2019, then all wages paid are “qualified.”
Also, in 2021, the number of wages considered to be credited was increased from 50% to 70% of wages, with a cap of $10,000 per employee per calendar quarter. This also includes health care expenses.
The ERTC offsets the employer’s portion of the social security tax.
There is a maximum credit of $5,000 per employee for the whole year.
For the first half of 2021, the ERTC offset the employer’s portion of the social security tax. Starting in July, with the American Rescue Plan of 2021, the ERTC offset the employer’s portion of Medicare tax.
The maximum credit amount was increased to $7,000 per employee per quarter. Recovery startup businesses were limited to a $50,000 credit per calendar quarter (third and fourth quarters).
A helpful chart to compare all of these criteria and changes is available from the IRS.
Background on Employee Retention Tax Credit
The COVID-19 pandemic took the world by surprise. With no weapons to fight the novel virus, governments were forced to shut down the economy to stop the spread of the infection. If a business was not considered essential, they were forced to close their doors.
Many businesses transferred online, attempting to adjust their operations to the virtual world. Other businesses could not adjust. And even of those that moved online, many had trouble adapting or lost customers.
The COVID-19 pandemic created a vicious circle that collapsed the world’s economy. The U.S. Congress responded by passing the CARES Act, which included the Employee Retention Tax Credit provision. With it, employers were given the incentive to keep their employees on their payroll and receive a tax credit for a percentage of the wages.
If your law firm is pursuing business seeking ERTC claims and you’re looking for a partner to assist with intake, case management, or other logistics, Case Works is here to help. Contact us today to discuss a customized solution to fit your firm’s ERTC needs.