A Definitive Guide to the Employee Retention Tax Credit (ERTC)
Get up to $26,000 Per W-2 Employee
The Employee Retention Credit is an IRS Tax Credit for Small Businesses affected by Coronavirus
Its Easy to Qualify for the Employee Retention Credit If Your Business Was Negatively Impacted by the Coronavirus in 2020 or 2021!
What is the Employee Retention Tax Credit?
In 2020, the government introduced the Employee Retention Tax Credit (ERTC).
Due to the deteriorating economic conditions during the pandemic, employers were encouraged to retain workers through the program.
Although the ERTC expired in October 2021, businesses can still apply for refundable tax credits applicable from 2020 to 2021. The Act alleviated pressure on small businesses and came as a sigh of relief to many business owners. But since the Act has been amended multiple times at this point, it can be tricky to get the hang of it.
Essentially, an eligible business can receive up to $21,000 per full-time employee for 2021 and up to $5,000 for 2020 (for a total up to a $26,000 tax refund per employee). The tax credits are refundable, so your business can receive a refund if the credit exceeds your tax liability.
Before we go any further – lets see how a company can qualify for the employee retention credit.
How To Qualify for the Employee Retention Credit in 2023
Employee Retention Tax Credit Eligibility
Any business can apply for ERTC, however the government has placed a size cap on it on how many employees can qualify in 2020 or 2021. But with that said, the Act does appear friendlier to smaller businesses that experienced a Covid Event that negatively impacted your business. In addition, your business will have had to be negatively impacted by Coronavirus by qualifying for one of several different “Covid events:”
Partial or Full Suspension
If the federal, local, or state governments order that your business closed or partially closed in 2020 or 2021, you are eligible for ERTC. An important observation here is that suspension refers to operations, not necessarily revenue. Your business might be eligible for ERTC even if your revenue increased as long as your business was closed. Partial closure means that a significant portion of normal operations was suspended, you could not meet with clients, your facility/office/store was temporarily closed, or other similar issues took place . Here are some other qualifying “Covid Events” and qualifying benchmarks:
Decrease in Gross Receipts
Your gross receipts must have decreased by 50% in 2020 or 20% in 2021. For an estimate, you can compare the receipts to the same quarter in 2019. If your business started functioning in 2020, you could use a quarter from 2020 to show the decrease.
Shutdowns or Limitations in your Supply Chain or Vendors
Suppliers were unable to make deliveries of critical goods or materials or there were reductions in the products, goods and services offered by your suppliers or vendors. Timely shipments of your inventory, products and supplies were delayed or interrupted and it negatively impacted your business.
If your business has a hundred or fewer full-time employees, you can get compensation for every employee. It doesn’t matter whether they were providing a service in 2020. For 2021, the limit is 500 full-time employees.
Your business is a bit more restricted if you have over 100 (for 2020) or 500 (for 2021) employees. You can only apply for employees who received their wages even when they weren’t providing a service.
The Employee Retention Credit and PPP Loans
If you previously received a PPP loan – can you qualify for the ERC Tax Credit? The short answer is, Yes!
Shortly after ERTC, the government introduced the Paycheck Protection Program (PPP). The program allows businesses to borrow money for up to eight weeks’ worth of wages and other business costs. Businesses of all shapes and sizes qualified for this program and billions of dollars were provided in relief loans. If your business received a PPP loan, it might still be eligible for ERTC. However, you can’t apply for both programs using the same wages. If you’ve used a set of wages to take a PPP loan, then you can’t count the same wages for Employee Retention Tax Credit. However, being that most businesses applied for the PPP loan well before the ERTC coverage period ended in September 2021 – many businesses still qualify!
Employee Retention Credit Flowchart
Other Tax Credits for Businesses Affected By Coronavirus
ERTC isn’t the only tax relief program for small businesses affected by the coronavirus. Some other plans include:
Families First Coronavirus Response Act (FFCRA)
The Act mandates paid leaves for employees. The employees can use this leave for their health or to care for other family members. The Act also provides funds for small business owners to cover these expenses.
American Rescue Plan Act of 2021 Leave Credits
The American Rescue Plan Act (ARPA) is mainly for employees. However, certain tax provisions let employers get 100% tax credits for qualified paid sick leave. The leaves can’t extend beyond two weeks.
Research and Development Credit (R&D)
You could get the R&D credit if you spent money on research and development to modify your business model or make changes to your operations to keep from going out of business.
Forgiveness on a PPP loan
If your small business withdrew PPP loans, they could apply for forgiveness. The forgiveness applies to both PPP loans. You can apply anytime before the loan’s maturity. The catch for all these programs is that you can’t use the same expenses for these programs and ERTC simultaneously.