Employee Retention Tax Credit (ERTC) is applicable for businesses who had full time employees and paid payroll taxes during TYs 2020 and 2021. ERTC is also for businesses that were ordered a complete or a partial shutdown during COVID. Employee Retention Tax Credit is not for self-employed individuals, sole props or single owner LLCs! Period.
As per the benefits, you may qualify to receive up to $28,000 per employee! Yes, that’s true.
Pre-Qualification Questions are as Follows:
• Did you suffer 20% monetary loss due to COVID 19?
• You were sent a notice for a partial or complete shutdown.
If you answered YES to any of the above questions, you may qualify for the Employee Retention Tax Credit.
Couple of Things to Consider Here Though:
• You had declining revenues for any eligible quarter in 2020 and 2021 against the same quarter of 2019. The IRS is using 2019 as the benchmark year in order to calculate percentage decline in sales.
• You retained employees even during COVID times.
• The employees worked for more than 30 hours a week ( that’s considered full time in order to qualify for the credit) and you paid them wages.
• You filed payroll taxes in 2020 and 2021 ( minus the last quarter of 2021, that quarter does not count for the IRS).
• The owner and family members, even if they ran payroll for themselves, do not qualify as eligible employees.
For some businesses such as restaurants, theatres, cinemas, music halls, etc. that were sent out shutdown notices by the State, such businesses qualify for immediate relief . They don’t need to fulfil the ‘declining revenue’ criteria. Copy of the shutdown notice sent either via email or USPS will be required.
Some new businesses that opened during COVID might also qualify too. See below on recovery startup businesses.
So How Does the Math Work Out?
In 2020, the Employee Retention Tax Credit will be calculated by taking 50% of the first $10,000 of qualified wages. The credit is limited to $5,000 per employee per quarter for 2020. If an employer has less than 100 employees in 2020 and qualifies for the credit, all wages for every employee qualify for the credit during the qualification period. If the employer has more than 100 employees only the wages paid to employees that were being paid for time they were not working during the qualification period count toward the calculation.
In 2021 the rules changed and are more advantageous to the employer. The credit was increased from 50% of qualified wages to 70% of qualified wages. Additionally, the credit limit was increased from $5,000 for the year to $7,000 per quarter. Therefore, the limit for 2021 is now up to $28,000 per employee.
What are the Documents Required?
Businesses are still eligible to apply for the ERTC by filing an amended 941X (Quarterly Federal Payroll Tax Return) for the quarters during which the company was an Eligible Employer.
What Information/Documents Would be Needed in Order to Pre-qualify?
– Summary of quarterly revenue
– Quarterly payroll tax returns
– Details of employee of wages paid by date
– Location of business operations and number of employees
– Summary of lines of business( what products, services do you offer, etc.)
– Detail of wages used for the Paycheck Protection Program( if applicable)
– Details of wages paid to employees for time spend not working( proof of reduced schedule).
How can I Help You?
GavTax here to help you-
– Determine if you as an employer qualify and if so, for which quarters.
– Determine which employee wages qualify.
• Totals of health insurance paid on behalf of the employees are also used to increase the credit.
• A listing of health insurance premiums the company paid for each employee.
– Calculate credits, including estimates for current and future quarters.
– Prepare suitable forms for employer to submit to the IRS to receive advances.
– After the quarter has ended, calculate the actual credits earned.
– Reconcile actual credits with advance credits.
– Prepare reconciled data for Form 941-X.
– Document the eligibility and calculations for the employer’s records.
ERTC Contd…
It was signed into law on March 27, 2020, as part of the CARES Act. The bill was significantly elaborated in 2021.
1. What is a recovery start up business?
As per the IRS, the term “recovery startup business” means any employer— (A) which began carrying on any trade or business after February 15, 2020 , and (B) for which the average annual gross receipts of such employer (as determined under rules similar to the rules under section 448(c)(3) ) for the 3-taxable-year period ending with the taxable year which precedes the calendar quarter for which the credit is determined under subsection (a) does not exceed $1,000,000.