Hurry Up! There’s Still Time to Claim the Employee Retention Tax Credit
Eligible businesses can file retroactive claims for wages paid in prior tax quarters
Although the Employee Retention Tax Credit (ERTC) is expiring at the end of 2021, there’s still time for eligible businesses to claim the credit, if they haven’t already.
“Eligible employers can still take advantage of the employee retention credit against applicable employment taxes and qualified wages paid to their employees through December 31, 2021.
“Although the program is set to sunset at the end of 2021, the credit can be claimed on amended payroll tax returns as long as the statute of limitations remains open, which is three years from the filing date.
ERTC Basics
The ERTC, also referred to as the Employee Retention Credit (ERC), was created by the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020 to encourage businesses to keep employees on their payroll. The Consolidated Appropriations Act, 2021 (CAA), enacted in December 2020, and the American Rescue Plan Act (ARPA), enacted in March 2021, amended and extended the credit and the availability of certain advance payments of the credits through the end of 2021.
The ARPA, for instance, allows small employers that received a Paycheck Protection Program (PPP) loan also to claim the ERTC.
“For 2021, an employer can receive 70 percent of the first $10,000 of qualified wages paid per employee in each qualifying quarter,” raised from 50 percent in 2020. The credit applies to wages paid or incurred from March 13, 2020, through December 31, 2021. The cost of employer-paid health benefits can be considered part of employees’ qualified wages.
Eligible Businesses
There is no size limit on eligibility for the ERTC. However, small and large businesses are treated differently, as below:
- For employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shutdown order.
- For employers with more than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to COVID-19-related circumstances.
Eligible employers are private-sector businesses and tax-exempt organizations that experienced:
- A full or partial shutdown of operations as a result of a government order limiting commerce due to COVID-19 during 2020 or 2021.
- The gross receipts decline by more than 50 percent during a 2020 or 2021 calendar quarter compared to the same quarter in the prior year.
- A “recovery startup” business launched after February 15, 2020, for which the average annual gross receipts do not exceed $1 million, subject to a quarterly ERTC cap of $50,000.
For the gross receipts test, Smith explained, a business must have experienced more than a 50 percent decline in 2020 (compared to the same quarterly period in 2019) to be eligible. For 2021, a business must have experienced more than a 20 percent decline in gross receipts compared to the same quarterly period of 2019. New businesses not in existence during a particular quarter in 2019 are permitted to substitute the corresponding quarter of 2020 for the comparison.
“If your business experienced a substantial decline in gross receipts but has since recovered and you didn’t claim the credit, you can go back and claim it now.
Eligible businesses can file a claim for a retroactive ERTC refund on previously paid qualified wages for past calendar quarters by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, or Claim for Refund.
“For retroactive claims for refunds related to ERTC, there is the potential for significant delays in receiving funds from the IRS due to their current backlog in processing 941-X returns.
Looking Ahead
“If Congress continues to be focused on aiding employers through incentive programs, it will be necessary for employers to monitor the programs that can potentially benefit them.
In addition to the ERTC, Smith explained, “there are other resources still available. For example, paid-leave tax credits have been extended and are available through the end of September.”
While PPP funds have been exhausted, Smith added, several Small Business Administration programs could make sense for eligible businesses, such as the Shuttered Venue Operators Grant program and Economic Injury Disaster Loans.
“The Restaurant Revitalization Fund is currently oversubscribed, but legislation has been introduced to provide another $60 billion towards that program,” Smith noted, “and several states, including New York, are launching state-based grant programs to help small businesses.”
Take-Aways for Claiming the ERTC
The final dates for eligible businesses to claim the ERTC are with their quarterly Form 941 tax filings, due July 31, October 31, and December 31, 2021. Business tax filers will need additional payroll data and other paperwork to file for the ERTC with their quarterly returns.
“We are seeing a much quicker turnaround for clients who file an original Form 941 return with the ERTC credit included versus those clients that have us go back after the fact and file an amended Form 941-X return to claim the credit.
“Turnaround time when having to file an amended return from the IRS is 90 to 120 days whereas when filing an original return, the turnaround is 30 to 60 days, we noticed.
Hayes advised businesses that may be eligible to claim the ERTC to take the following steps:
- Determine ASAP if the company’s employees meet the ERTC criteria.
- Visit the IRS ERTC website.
- Locate all payroll information for the last few years.
- If a business cannot determine eligibility or prepare the necessary Form 941s, reach out to a business solutions provider.
- Don’t delay assembling the required documentation and submitting it to the IRS before the quarterly deadline.
“The faster an eligible business files, the quicker they will receive these vital funds.
Update: New Guidance on Claiming the Employee Retention Credit
On August 4, 2021, the IRS issued further guidance on the employee retention credit, including guidance for employers who pay qualified wages after June 30, 2021, and before January 1, 2022, and issues that apply to the employee retention credit in both 2020 and 2021.
Notice 2021-49 amplifies prior guidance regarding the employee retention credit provided in Notice 2021-20 and Notice 2021-23.
The new guidance addresses changes made by the American Rescue Plan Act (ARPA) to the employee retention credit that applies to the third and fourth quarters of 2021. Those changes include, among other things:
- Make the credit available to eligible employers who pay qualified wages after June 30, 2021, and before January 1, 2022.
- Expanding the definition of eligible employer to include “recovery startup businesses.”
- Modifying the definition of qualified wages for “severely financially distressed employers.”
- Providing that the employee retention credit does not apply to qualified wages taken into account as payroll costs in connection with a shuttered venue grant under section 324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act or a restaurant revitalization grant under section 5003 of the ARPA.
Notice 2021-49 also responds to various questions that the Treasury Department and the IRS have been asked about the employee retention credit for both 2020 and 2021, including:
- The definition of a full-time employee and whether that definition includes full-time equivalents.
- The treatment of tips as qualified wages and the interaction with the section 45B credit.
- The timing of the qualified wages deduction disallowance and whether taxpayers that already filed an income tax return must amend that return after claiming the credit on an adjusted employment tax return.
- Whether wages paid to majority owners and their spouses may be treated as qualified wages.
Reporting
Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their employment tax returns (generally, Form 941, Employer’s Quarterly Federal Tax Return) for the applicable period.
Suppose a reduction in the employer’s employment tax deposits is insufficient to cover the credit. In that case, certain employers may receive an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.