Employers that were eligible and paid qualified wages, as well as qualified health plan expenditures, were eligible for a refundable employment tax credit under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act. This tax credit was made available to any employer whose business activities were either completely or partially halted as a result of directives from a governmental body, as well as to any employer whose gross receipts had significantly decreased.
At one point, the CARES Act stipulated that the ERC would be covered from March 13, 2020, all the way through December 31, 2020, with a maximum ERC of up to $5,000 per employee. Subsequent legislative actions both extended and enlarged the ERC:
The ERC has been enlarged to cover wages earned before to July 1, 2021, as a result of the Consolidated Appropriations Act, 2021 (CAA), which went into effect on December 27, 2020. Additionally, the maximum ERC has been increased to $7,000 per employee every quarter.
The American Rescue Plan Act of 2021 (ARPA), which went into effect on April 1, 2021, expanded the scope of the coverage to include wages earned between July 1, 2021 and December 31, 2021.
The Internal Revenue Service (IRS) had previously issued guidance (Notice 2021-49) regarding the claiming of the ERC in the third and fourth quarters of 2021. However, this guidance came with the disclaimer that the IRS “will continue to monitor potential legislation related to the employee retention credit that may impact certain rules described in this notice.”
Key Considerations for Employers
Employers that had expected receiving the ERC during the fourth quarter of 2021 would be impacted by the repeal of the ERC that will take effect as a result of the IIJA on September 30, 2021. For instance, several employers probably decreased the amount of tax payments they sent in preparation for the ERC. It’s possible that other employers have factored the ERC into their budget calculations.
As a consequence of this, an employer who has kept payroll taxes in preparation for receiving the ERC in the fourth quarter of 2021 may wish to ascertain whether or not any tax amounts have been underpaid and establish whether or not there are any employment tax compliance difficulties.
The Internal Revenue Service may release guidelines offering transition relief from late deposit penalties and/or directions on how employers are to pay back any credit advances accepted in the fourth quarter of 2021. These instructions and guidance may be issued at the same time. It is important to claim that a “recovery startup business,” as described in the ARPA, is eligible to continue claiming the ERC for the rest of the fourth quarter.
Employers that are eligible but have not yet claimed (or incorrectly claimed) any ERC for qualified wages paid between March 13, 2020 and September 30, 2021, or later, have the opportunity to do so by amending their quarterly employment tax returns using Forms 941-X, “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.”
What Is the Employee Retention Credit, Also Known as the ERC, and How Does the Program Operate?
Following the outbreak of the Covid-19 epidemic, the United States Congress enacted a number of measures designed to offer financial support to businesses who were forced to suspend their activities. One of these programs was the credit for keeping employees on employee (ERC).
The ERC provides payroll tax credits to qualifying employers in exchange for wages and health insurance payments made to employees. The ERC program was terminated nevertheless as a direct end of the Infrastructure Investment and Jobs Act being passed and signed into law in November of 2021.
Despite the fact that the program has come to an end, businesses still have the possibility to claim ERC retrospectively for a period of up to three years. This article will provide an explanation of the program’s operation as well as instructions on how your business may claim this credit.
What Is the ERC, Exactly?
The ERC is a refundable payroll tax credit that was established as a part of the CARAR +4.7 percent ES Act. Its initial availability date was March 13, 2020, and its termination date was December 31, 2020. During the epidemic, the ERC’s main objective was to persuade employers to continue paying their employees regardless of whether or not they were sick.
Employers who met the requirements and borrowers who had taken out a Paycheck Protection Program loan were able to claim up to fifty percent of qualified wages. This percentage also included any eligible health insurance costs. The ERC was given more authority as a result of the Consolidated Appropriations Act (CAA). Employers who meet the requirements in 2021 are eligible to claim a credit equal to 70 percent of the wages paid to qualifying employees.
Who Can Participate in the ERC and Why?
It is dependent on the time frame that you are applying for as to whether or not you are eligible for the ERC. To be eligible for the year 2020, you must have previously managed a company or tax-exempt organization that was either partially or completely put out of business as a result of Covid-19. You also need to demonstrate that you had a substantial decrease in sales, which is defined as less than fifty percent of comparable gross revenues in comparison to 2019.
To be eligible for the year 2021, you will need to demonstrate that your gross receipts fell by at least 80 percent compared to the same time period in 2019, when those receipts were taken into account. You can compare your business’s gross receipts to those of 2020 even if it wasn’t in operation in 2019.
The CARES Act does make it illegal for those who are self-employed to get ERC benefits for wages they have paid themselves. You are not permitted to claim wages for specific people who are linked to you; nevertheless, you are permitted to claim the credit for wages given to employees.
What Does It Mean to Have Qualified Wages?
The size of your business and the number of employees you have working for you determine the minimum wage requirements that must be met in order to qualify as qualifying wages. There is no maximum size requirement to be eligible for the ERC; however, we do have distinct expectations for small and large businesses.
If you had more than 100 full-time employees in 2019, you will only be able to claim the wages of those employees who you kept on staff but who were not actively working throughout the tax year 2020. If you have less than one hundred employees under your payroll, you are allowed to claim everyone, regardless of whether they were working or not.
The requirement that an employer must have at least 100 full-time employers in order to claim for the credit in 2021 has been upped to a level that requires them to have at least 500 full-time workers in 2019. You can include eligible health costs in the calculation of the tax credit, and you can count any wages that are subject to FICA taxes as qualifying income.
This money should have been received between March 13, 2020 and September 30, 2021 at the very latest. Nevertheless, recovered beginning businesses have the opportunity to claim the credit until the end of 2021.
How to Apply for the claim Tax Credit?
Despite the fact that the program was terminated in 2021, there is still time for businesses to claim ERC claims. During the process of filling your tax returns to the federal government, you will need to complete Form 941 in order to claim this tax credit.
Some businesses, particularly those who had been granted a loan under the Paycheck Protection Program in 2020, were under the incorrect impression that they were ineligible for the ERC. If you have already filed your tax returns but have recently realized that you are qualified for the ERC, you can submit a retroactive application by filling the Adjusted Employer’s Quarterly Federal Tax Return. This will allow you to be considered for the ERC retrospectively (941-X).
Because of the recent changes to the tax regulations that pertain to the ERC, it can be difficult for many business owners to determine whether or not their companies are eligible. Additionally, it might be difficult to determine which wages are acceptable and which are not. If you own more than one business, the procedure will be considerably more challenging for you. In addition, if you make a mistake when filling out the necessary IRS paperwork, the procedure might be held up.
If you are having difficulties applying for the ERC, it may be beneficial to speak with someone who specializes in tax. That individual can provide a hand in ensuring that you are moving in the proper direction. For further information on the ERC, you may also consult the IRS’s list of frequently asked questions about the program.
This material is not intended to serve as investment, tax, or financial advice and should not be used as such. It is highly recommended that you get the guidance of a certified expert on the unique circumstances of your case.