untapped refunds employee retention tax credit

Untapped Refunds – Employee Retention Tax Credit (ERTC/ERC) 2021, 2022, and 2023

Introduction

Employee retention tax credit has been a viable option for employers since the start of the pandemic crisis. The pandemic created a lot of financial problems and operational challenges for businesses. In terms of losses, small and medium-sized businesses paid the highest price during this time.

But when the employee retention tax credit came into the picture, employers took a sigh of relief knowing that they could recoup their 2020-21 paid employment wages and claim the ERC tax credit. Oftentimes, added time and complex processes can be daunting for small businesses. Still, if startups want to dive into this venture, they will have to meet all the ERC requirements. 

Keeping that in mind, let’s take a look at the basics of ERTC in 2021 and 2022 and how businesses can tap into employee retention tax credit in 2023:

A Look at Employee Retention Tax Credit

Well, between “what is ERC” and “what is ERTC” – it is easy to get confused and get caught in the overlapping terminology. At its core, the employee retention tax credit is a refundable quarterly-based tax credit designed and developed to help companies deal with COVID-19 pandemic issues.

Employee retention credit made it possible for many employers to retain their employees. When it comes to ERC, numbers stand out. While it depends on the submission date, businesses can take tax credit worth 50%-70% of each employee’s salary. It makes it all the more important for businesses to leverage the employee retention tax credit regardless of industry or size.

ERTC provides qualified small and mid-range entities the resources to get more than 50% of paid qualifying wages. The timeframe is from March 13, 2020, to December 31, 2020. Businesses that received a PPP loan or grant can still qualify for employee retention tax credit. At most, the company can get an ERTC of over $26,000 for each employee.

ERC Qualified Wages

In the context of ERTC and ERC, qualified wages refer to any paid wages by a qualified business to a full-time worker after March 12, 2020, and prior to January 1, 2021. 

Practically, it applies to businesses that had a significant reduction in their gross receipts or experienced a shutdown of operations during the pandemic. ERC works as a refund and helps businesses with a grant to recoup over $26,000 on each employee. Assume all paid wages to workers are qualified wages from March 2020 to the end of 2021.

While the average credit tax return is $11,000 – it depends on the covered health care, designated salaries, and personnel expenses by employers. 

Calculate Your Employee Retention Credit

As an employer, if you want to calculate your ERC, your first need to figure out “when” your company was affected during the pandemic. If you’re eligible, ERC can cover 50% to 70% of your company’s paid quarterly wages of 2021 and 2021.

Remember that the credit is applicable to paid wages “before” January 1, 2021, and March 12, 2020. Since qualified paid wages have a threshold of $10,000, the highest possible eligible wages you can recoup for this period are $5,000 per employee. For 2021, however, the maximum qualified tax credit employers can get is $28,000

ERC: Eligible Businesses Employers?

If you’re still not sure whether or not you’re eligible to claim ERC credit, review and compare the following information:

2020

  • Annually $5,000+ for each employee
  • Employers with 100 or less employees since 2019

2021

  • Quarterly $7,000+ on each employee
  • Employers with 500 or less employees since 2019

So, what happens if you exceed these stated thresholds? Well, you can still get an exception and qualify for ERC.

Main Eligibility Requirements

The first eligibility requirement applies to the quarterly decline in gross receipts of a business. It can include receipts from different business sources. It is also crucial to include investment and exempt income to balance out the odds.

For instance, you will need to consider a reduction in the cost of investments, the cost of goods sold, or expenses to collect and raise funds to determine your ERC eligibility. But remember not to include receipts of PPP loans to determine your eligibility to avail ERC.

ERC 2020

  • Over 50% decline in one or more 2020 quarters compared to a similar 2019 quarter

ERC 2021

  • Over 20% decline in one or more 2021 quarters compared to the same quarter 2019 quarter

The second eligibility requirement that makes a business eligible to apply for and claim employee retention credit is if a business experienced a partial or complete shutdown of operations. Upon federal and state government directions, many businesses had to close operations in 2020 due to the COVID-19 pandemic. In most cases, it requires proper documentation to assess the closure impact and severity of that impact.

If your business experienced a decrease in employee working hours by 10% in the same 2019 quarter, you could leverage ERTC. But make sure this percentage justifies and makes sense of a partial or complete shutdown due to the COVID-19 pandemic.

What Does it Take to Claim Employee Retention Credit?

All businesses have to do is report their paid qualified wages to claim ERC. Apart from wages, employers also have to report health insurance costs for the same quarter of returns. Businesses can fill out and submit Form 941-X to report this information to the IRS.

The Internal Revenue Service has allocated three years for businesses to file an adjusted employment tax return. The starting point of three years is from the date employers filed the original tax return.

Apply for the ERC in 2022

While the ERC initiative came to an end on October 1, 2021, there is still an open window for businesses to claim a tax credit on paid wages. Like 2020 and 2021, the process to secure tax credits was the same in 2022. However, employers noticed changes in the quarter and annual thresholds.

Nonetheless, businesses can use Form 941-X to file a claim for employee retention credit. Fill out and submit the form for tax returns. Make sure to answer all the questions in this form that span across three pages. If you haven’t had the chance to file your credit – you can file for a separate ERC refund. Employers can also apply for this ERC refund using two forms of 941-X.

It means you can use Claim Refund or Quarterly Tax Return Form to apply for an ERC refund. While this form is similar, businesses have to describe the reason behind the delay. For each quarter, use a different Form 941-X that requires correction.  

Will Employee Retention Tax Credit Expire?

Technically, the employee retention tax credit is expired. But there is a fog of confusion around its specific expiration date. It is assumed to be from September 30, 2021, to December 31, 2021. From the perspective of recovery businesses, the employee retention tax credit ended on January 1, 2022.

However, eligible businesses can continue to leverage the employee retention tax credit against paid qualified wages and applied employment taxes. Since the statute of limitations doesn’t end until three years “after” the filing date, employers can claim the credit on adjusted payroll tax returns.

What Your Business Can Claim in 2023?

Eligible recovery businesses can get $7,000 of credit per employee and quarter. The maximum limit of credit you can get in the last two quarters is $50,000. Keep an eye on your quarterly gross receipts if you want to boost your credit amount.

Your goal should be to ensure you don’t exceed the $1 million revenue threshold. For example, if you have four full-time employees, multiply this by $7,000 in quarter 3, which will get you $28,000 in tax credits. You’ll also get the same credit if you run the same calculations for the fourth quarter.

A startup company with full-time four employees can get as high as $56,000 from the IRS in tax credits. In a broad sense, it might be a small amount to a large corporation, but it can change the trajectory of a small startup. Employers can use claimed funds for equipment, marketing, inventory, new workplace, or cover expenses to drive more business growth.

After receiving the credit amount, the startup business can distribute it among the owners. In fact, there are little to no restrictions as to how employers should use their received employee retention credit amount.

Wrap Up

In 2020, Employee Retention Credit came across as a newfound hope for businesses struggling to retain employees and sustain operations amidst the COVID-19 pandemic. The idea was to encourage businesses to hold onto their talented employees during the COVID-19 outbreak if there is a partial or complete closure. In 2023, businesses that followed the ERC requirements can still claim tax credits.

If you’re eligible, run ERC calculations more than once and prepare the adjusted payroll tax returns to claim your refunds. In hindsight, the employee retention tax credit is a solid business opportunity. Ideally, you should talk to a tax professional to better understand the ERTC. You should collaborate with a tax expert and follow the IRS requirements to claim and reap the benefits of the tax credit.

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