When is the Employee Retention Credit Deadline?
Government regulations are often confusing, particularly with the ongoing changes to rules, qualifications, and deadlines. The Employee Retention Tax Credit (ERTC) is currently undergoing these changes.
The ERTC retroactive period’s original deadline was January 1, 2022. It has changed to October 1, 2021. There are also qualification changes. However, the program’s ending does not impact a business’s ability to claim ERTC retroactively. Businesses have up to three years from the program’s sunset to review their accounts and determine if wages paid after March 12, 2020, to the end of the program, are eligible.
There are several benefits to the ERTC. However, the National Federation of Independent Business (NFIB) found that just 4% of small business owners know about the ERTC program. Only 8% of owners received it in 2020 and 10% in 2021.
What do the changes and adjustments mean for your business? Could you be eligible for the employee retention credit program for wages paid through December 31, 2021?
Let’s dive into what the program offers and how to determine if you qualify for the benefits it offers.
What Is the Employee Retention Tax Credit (ERTC)?
The Coronavirus Aid, Relief, & Economic Security Act (CARES) created the ERTC. The government signed it into law in March 2020, and it helps businesses keep their employees on the payroll.
The American Rescue Plan Act (ARPA) and the Consolidated Appropriations Act 2021 (CAA) also impacted the CARES Act. Both acts modify and prolong credits and advance payments through 2021.
The ERTC provides small to mid-size businesses with a credit of up to 50% of qualifying wages from March 13 to December 31, 2020, including employers receiving loans under the Paycheck Protection Program (PPP). The maximum payout is $10 thousand in wages per employee.
The CAA raised the tax credit amount to 70% for wages paid through the end of 2021, including some health insurance costs. The maximum for this credit is $10 thousand in wages per employee per quarter throughout 2021’s first two quarters.
What Is the Infrastructure Investment & Jobs Act?
The Infrastructure Investment & Jobs Act (H.R. 3684) went through congress on December 2, 2021. Title VI—Other Provisions, §80604 addresses termination of ERC for employers who experienced closures due to the pandemic.
It revised the deadline to October 1, 2021, except for wages paid by a recovery startup business. The original January 1, 2022 deadline for those businesses is still accurate.
Recovery startups do not need gross receipts reduction or business closure to qualify. All recovery startups are eligible in 2021’s fourth quarter.
The 2021 fourth quarter elimination impacts most businesses by lowering the maximum credit from $28,000 to $21,000, which hurts businesses basing their financial expenditures on the assumption that they will receive the 2021 fourth quarter ERC.
With that in mind, who will qualify for the ERC? Let’s look at that now.
Who Qualifies for Employee Retention?
Your 2019 records will determine your eligibility. If businesses had 500 or fewer employees in 2019, they might qualify. You’ll need your 2020 or 2021 gross receipts to be at least 20% lower per quarter than what they were at the same time in 2019.
Businesses with 100 or fewer full-time employees could qualify for a 100% employee wage credit. In this case, they could receive it whether the business is open or received a shutdown order.
Businesses with over 100 employees may qualify if they paid employee wages while not providing services because of COVID-19 restrictions. The company must be in the private sector or a tax-exempt organization to qualify. They must also have experienced the following in 2020 or 2021:
- A full or partial shutdown because of government limits on commerce throughout the COVID-19 pandemic
- Gross receipts of 50% or under what they were during the same 2019 calendar quarter
- A “recovery startup” beginning after February 15, 2020, with yearly gross receipts of $1 million or under. This feature also has an ERC cap of $50,000.
If your company recovered from a large decline in gross receipts and didn’t claim the credit, you can claim it in 2022. To assess your eligibility, your business will have three years following the program closure to review past wages paid after March 12, 2020.
The IRS released on August 10, 2021, Revenue Procedure 2021-33 offers a “safe harbor” for employers. It permits the exclusion of:
- The forgiveness of a PPO loan
- The Shuttered Venue Operators Grant amount
- The amount of a Restaurant Revitalization Fund Grant
These funds don’t need to be added to the gross receipts when assessing your eligibility for the ERTC. You need to apply for the “safe harbor” across all your associated entities.
How Does the Employee Retention Tax Credit Work?
Many things go into determining the retention credit. Your company must have paid the qualifying wages between March 12, 2020, and September 30, 2021, or December 31, 2021, for recovery startups. Additionally, wages not forgiven under PPP are not eligible.
What’s more, specific situations will determine if health expenses qualify, including employee and employer pretax portions.
To receive the ERTC, your company must monetize the credit for each payroll period. You’ll do this by filing a quarterly payroll tax return with Form 941 and retaining the payroll taxes it holds back from employee wages.
If your business spends $100,000 in payroll, you can expect a $70,000 credit. With the ERTC, you’ll keep your payroll taxes as a credit advancement, which you can use for business operations.
With the ERC ending early, you’ll now owe the government payroll taxes held back for the fourth quarter of 2021. Your business will also be subject to a 10% penalty if you do not deposit the payroll taxes.
What Wages Qualify When Determining the ERTC?
Generally, wages subject to FICA taxes and qualified health expenses will be applicable when determining the employee retention tax credit. Your business must have paid these after March 12, 2020. You’ll qualify for the credit for those wages you paid through September 30, 2021. If you’re a Recovery Startup Business, the cut-off is December 31, 2021.
Remember, the government will only apply the credit to wages they did not forgive or will forgive under the PPP.
When looking at your qualified health expenses, the IRS has several methods of calculating them based on your unique situation. In most cases, these expenses will include the employer and employee pretax portion and not after-tax amounts.
When you’re looking at qualifying wages, you’ll first need to calculate your business size.
For the ERTC, the provision defines a full-time employee as one who worked at least 30 hours per week in any calendar month of 2019 or worked 130 hours in a month. They also base the definition on the employer shared responsibility provision in the ACA.
- Suppose you were in business for the entire calendar year of 2019 or 2020. In that case, you’ll divide your total full-time employees in each calendar month by 12.
- If you launched a business during 2019 or 2020, you’d determine the number of full-time employees by taking your total full-time employees in each full calendar month of 2019 or 2020 you were open and dividing it by that number of months.
- If you started a business in 2021, you’d determine the number of full-time employees by taking your total full-time employees in each full calendar month of 2021 that you were open and dividing it by that number of months.
Note: The government doesn’t calculate the PPP forgiveness report the same way as a full-time employee for the employee retention tax credit. For accounting professionals, you won’t want to give your clients the PPP Forgiveness FTE information. Also, remember that if a client received or will receive forgiveness for a PPP loan, they could now be eligible for the ERTC on specific wages.
CARES Act – 2020
Companies with over 100 full-time employees can only use the qualified wages of employees not providing services due to suspension or business decline. Additionally, for larger employers, you cannot include any vacation, sick, or other paid days off within your current company policy in qualified wages. Basically, you can only use this credit on employees who aren’t working.
Employers with under 100 full-time employees can use all employee wages. It includes working employees and any time paid not being at work except for paid leave offered under the Families First Coronavirus Response Act.
Consolidated Appropriations Act – 2021
This law ups the employee limit to 500 when deciding which wages the credit includes.
American Rescue Plan Act – 2021
This law allows certain hardest-hit businesses, those under great financial distress, to claim the credit against 100% of employees’ qualified wages instead of solely those not providing services. These businesses are employers whose gross receipts in the 2021 quarter are less than 10% of what they were in 2019 or 2020 in the same period. It only includes 2021’s third quarter for businesses that aren’t Recovery Startups.
Additionally, the IRS set up guardrails to prevent wage increases that may count toward the ERTC once the employer is eligible.
Are Tipped Wages Included in Qualified Wages?
IRS notice 2021-49 clarified that tips are included in qualified wages if these wages were subject to FICA. Generally, suppose an employee’s tips are over $20 in a calendar month. In that case, the tips total is included in qualified wages for ERTC. Tips under that amount in a month are not subject to FICA and don’t qualify for the credit.
Are Owner-Spouse Wages Part of Qualified Wages?
From a previous statute and IRS guidance (IRS FAQ #59 ), we can understand that the credit did not include related individuals to the majority owner in qualified wages. However, the owner and spouse’s wages were unclear. Related individuals include:
- Descendant of a child
- Siblings, including stepbrother or stepsister
- Father, mother, or either’s the ancestor
- Stepfather or stepmother
- Niece or nephew
- Aunt or uncle
- All in-laws
Notice 2021-49 clarified that we must apply attribution rules to determine whether we can include the owner or spouse’s wages. We base the ruling on the related individuals included in the above list. Suppose any of these individuals would be considered a majority owner. Their wages are not qualified for ERTC.
Remember that the IRS clarified rules apply to all quarters for ERTC. So, if someone didn’t categorize the wages as qualified for ERTC, you would need amendments to the 941 to correct any accidental errors.
You May Still Be Eligible
Despite October 1, 2021, expiration date, you may still be able to take advantage of the employee retention tax credits.
If you haven’t filed for the credit before, you could file for a retroactive ERTC refund. To file retroactively, you will deliver an Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, Form 941-X. As long as you’re applying within three years from your original filing date, you’re within the deadline.
IRS Notice 2021-49
IRS Notice 2021-49 offers clarification on the ERC for employers paying qualified wages between June 30, 2021, and January 1, 2022. It covers the ERC for 2020 and 2021.
Alterations from the ARPA to the ERC cover the third and fourth quarters of 2021 and include:
- Delivering a credit to employers with qualified wages between June 30, 2021, and January 1, 2022
- Allowing “recovery startup businesses” into eligible employers
- Modifying the definition of “severely financially distressed employers.”
The ERC does not apply to payroll wages tied to §324 of the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. Additionally, it doesn’t apply to §5003 restaurant revitalization grants.
The notice clarifies questions regarding 2020 and 2021 ERC credits, including:
- How to treat tips and interaction with §45B credit
- The definition of full-time employees and full-time equivalents
- Wages paid to majority owners and spouses
- Qualified waged deduction disallowance timing
The notice indicated whether a taxpayer has to file an amendment using an adjusted employment tax return.
Suppose an employment tax deposit reduction does not cover the credit. In that case, the employer could receive an advance payment from the IRS. To get an advance payment file, you’ll need the Advance Payment of Employer Credits Due to Covid-19 form, number 7200.
Each clarification in IRS Notice 2021-49 applies to the whole ERTC timeframe.
The IRS notice 2021-20 has seven examples with scenarios of how an employer with PPP loan figures out their eligible tax credit wages. The amount eligible mostly depends on how your qualified wages connect to the PPP loan forgiveness application. You might be able to utilize qualified wages in reported payroll costs on the forgiveness application in certain conditions where you used more expenses than required to justify your loan forgiveness. In these situations, the IRS will take the minimum wage cost required and additional eligible expenses to warrant loan forgiveness.
However, the IRS clarified that you could not factor in expenses eligible for PPP forgiveness not included in the loan forgiveness application after the fact. So ensuring all eligible expenses, including non-payroll costs like rent, utilities, and operations expenses, are included on PPP loan forgiveness applications is crucial when maximizing the qualified wages available for the ERTC.
Getting an Employee Retention Tax Credit in 2022
Understanding whether your business qualifies for the employee retention tax credit in 2022 can be confusing. And you may be wondering about filing a retroactive or amended return. If so, we’d be happy to help you. Contact ERTC daily today to learn more about the process, and we’ll guide you through the steps for filing.
We can address your concerns and help you with the employer retention tax credit, CARES Act, tax consulting, and filing options. Give us a call to ensure you receive all potential business credits. We’re ready to help you.