Business owners, large and small, have been battling the economic struggle resulting from the pandemic since March 2020. During the tumultuous months and years that have followed, the government has put in place a series of initiatives designed to improve business prospects.
Employee Retention Tax Credit, or ERTC, is one of these government programs. The tax credit specifically has undergone some changes since its enactment in 2020. Here's the crash course in the Employee Retention Tax Credit that you've been searching for if you're curious about what it is, how it works, or if your business can qualify.
Employers are provided with the Employee Retention Tax Credit as a tax incentive because it encourages them to keep their employees on payroll during the pandemic. It is a component of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Originally, employers had the option of taking out a Paycheck Protection Program (PPP) loan or claiming the Employee Retention Tax Credit (ERTC), also known as the retention tax credit. That changed with the Consolidated Appropriations Act. Now even businesses that received a PPP loan can take advantage of the ERTC, and the ERTC has been extended until Q3 2021 for most businesses (and until the end of 2021 for certain startups that meet certain requirements).
ERTCs are refundable tax credits that, in total, allow businesses to deduct $26,000 from their taxes for each employee. In 2020, there will be a maximum credit of $21,000 per employee and in 2021, there will be a maximum credit of $5,000 per employee.
Businesses are the only ones who can apply for the ERTC. Additionally, it applies only to employees on their payroll, not contractors or others. In contrast to tax deductions, the ERTC tax credit is subtracted from the taxes owed by qualifying businesses. Tax credits mean businesses owe less in taxes as a result of taking advantage of them.
ERTCs are refundable tax credits (rather than nonrefundable or partially refundable tax credits), so any business that qualifies for an ERTC can claim the entire amount of the credit, regardless of income or other tax obligations.
Businesses can deduct up to $26,000 per employee from their taxes through the ERTC, a refundable tax credit
Don't worry if your business started in 2020. Your business will be compared to 2020 if you are claiming the 2021 Employee Tax Credit.
Businesses of any size are eligible for the ERTC - there are no restrictions on the number of employees they can have. The program, however, is more accessible to smaller businesses.
If your business experiences a 20% decline in gross receipts in Q1, Q2, or Q3 compared to the same quarter in 2019 (or 2020 if your business started in 2020), you'll be eligible for the ERTC 2021.
It is possible, however, for certain startups to claim an ERTC for Q4 of 2021 as well, if they meet certain requirements. The ERTC is generally available to businesses starting operations after February 15, 2020 and with gross receipts of $1 million or less for Q4 of that year. You do not have to meet the criteria above regarding revenue decline or government shutdown requirements if this is your business.
The time window provided by the ERTC is one of its best features. If the law does not change in the future, businesses have up to 3 years after the sunset of the program (Q3 of 2021) to claim the tax credit on payroll tax returns.
The specifics of the Employee Retention Tax Credit vary depending on your business, as they do with most tax-related matters. Although budgets are usually tight, it's a good idea to seek the help of a CPA or other tax professional to determine exactly how the ERTC fits into your business plan.