The Employee Retention Tax Credit (ERTC) is set to expire at the end of 2021, but that doesn’t mean that businesses are out of time to take advantage of the credit. The exact details of the ERTC have changed since it was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act in March of 2020. After multiple extensions, it’s likely that the ERTC won’t be around after Dec. 31, 2021.
Fortunately for businesses, the most recent updates have made it easier to benefit from the ERTC. Between the Consolidated Appropriations Act and American Rescue Plan, the IRS has loosened its criteria for which businesses qualify and increased how much businesses affected by COVID-19 can claim. Here’s a breakdown of what has changed for the ERTC and how businesses can claim tax credit before it’s too late.
Key Updates To The ERTC
Relaxed standards for eligible businesses
Businesses of all sizes can qualify for the ERTC. There are a variety of factors that the IRS uses to determine if a private-sector business or tax-exempt organization is eligible for the tax credit. These factors have changed over time since the ERTC was introduced in 2020. As of now, the following criteria are used for eligibility:
- A full or partial suspension of trade or business operations during 2020 or 2021 due to governmental orders stemming from COVID-19.
- A decline in gross receipts of more than 20% (previously 50%) during a calendar quarter in 2020 or 2021 when compared to the same quarter from the 2019 year.
- New businesses – called "recovery startup" businesses – created after Feb. 15, 2020, and have average annual gross receipts that are $1 million or less.
Originally, the CARES act excluded Paycheck Protection Program (PPP) loan recipients from qualifying for the ERTC. That exclusion has changed and businesses that received PPP loans can also qualify for the ERTC retroactive to March 12, 2020.
Changes to how much businesses can claim
The credit is based on an eligible business’ “qualified wages.” In the past, businesses with 100 or more employees would only count wages paid while the employer could not provide services due to COVID-19. The CAA changed it so that any eligible business with fewer than 500 employees can consider all employee wages as qualified for the credit whether they are subject to a shutdown order or open for business. In addition, businesses can consider any employer-paid health benefits as part of employees' qualified wages.
The exact amount of the credit has also changed since the ERTC was first introduced. The credit was increased from 50% of qualified wages paid during the calendar quarter to 70% thanks to the Taxpayer Certainty and Disaster Tax Relief Act of 2020. That rate was kept when the ERTC was extended through Dec. 31, 2021.
Eligible employers can apply that 70% to their qualified wages up to a limit of $10,000 per quarter. As a result, employers can receive a maximum quarterly credit of up to $7,000 per employee, or $28,000 combined for all four quarters. However, businesses that received PPP loans will still receive a maximum credit of only $5,000 per employee.
New exceptions for “severely distressed” employers
Another change that the American Rescue Plan Act made to the ERTC involved loosening up some of the restrictions placed on what the IRS considered "severely financially distressed employers." The Act allows employers to claim tax credit for all employee wages up to the limit as long as they can demonstrate reductions in gross receipts of at least 90% compared to the same calendar quarter in 2019.
How To Claim The ERTC For Your Business
Any eligible employers must report their total qualified wages and the related health insurance costs on their quarterly employment tax returns to claim credit. For most employers, this will require filling out Form 941 and including relevant information for each quarter. The final date to claim the ERTC is now Dec. 31, 2021.
Businesses that may have previously missed opportunities to claim the ERTC are also in luck. Eligible businesses can retroactively claim an ERTC refund on qualified wages paid for past quarters within the ERTC timeline. Employers would need to file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, in order to make up for that lost opportunity.
While the deadline is Dec. 31, 2021, it’s best to collect all the required documentation and submit it to the IRS earlier than that date. The quicker a business files this information, the sooner it will receive ERTC funds, as turnaround times are roughly 30 to 60 days. This need for prompt filing is especially true for Form 941-X. The estimated turnaround time for retroactive claims is roughly 90 to 120 days, and there could be significant delays as the IRS addresses its current backlog of 941-X returns.
Prepare Your Business For The ERTC And More
While it’s easier to qualify for the ERTC in 2021 than in the past, it’s still not a simple process. Employers still need to parse through a lot of payroll data to even determine if they’re eligible – and then they’ll have to collect and complete even more documentation to claim those important funds.
If that sounds like a lot of complicated, tedious work, it is. That’s why so many businesses partner with GMS to manage their payroll administration and stay on top of ongoing legislative changes. While our experts take on time-consuming tasks in payroll processing and tax management, you can focus on your own business and make the most out of opportunities like the ERTC.
Ready to simplify your business? Contact GMS now about how we can help you stay on top of tax credits and more.