The Employee Retention Tax Credit (ERTC) may have expired for most businesses more than a year ago, but there’s still time to file a claim. Business taxpayers have three years to file an amended payroll tax return if it is determined eligibility requirements have been met. This means that a Denver company that is eligible but has not yet claimed the credit is not out of luck. Many are taking a second look at the pandemic-era incentive to determine if their organization qualifies. It is commonly happening as part of the year-end tax planning process. To help clients, prospects, and others, Hanson & Co has summarized the key details below.
Employee Retention Tax Credit Refresher
The ERTC gave cash back to eligible employers throughout 2020 and 2021 who kept employees on the payroll during the pandemic. It was one of the most valuable incentives, but the rules changed several times, so employers may not have known they qualified. Amended payroll tax returns, Form 941X, which are needed to claim the credit retroactively, can be filed for up to three years.
In 2020, the ERTC was limited to 50 percent of a full-time employee’s wages, up to $10,000, for a yearly maximum credit of $5,000 per employee. From January 1 – June 30, 2021, ERTC was expanded to 70 percent of the first $10,000 in qualified wages, per employee, per quarter, for a total yearly benefit of up to $28,000 per employee. It was also expanded to include tax-exempt organizations and colleges and universities that are part of hospitals. The credit was extended for all eligible businesses for the third quarter in 2021 but was retroactively terminated for the fourth quarter.
How the credit was calculated changed over time. In 2020 and through June 30, 2021, the credit was applied to the employer’s portion of Social Security taxes. From July 1 – December 31, 2021, it only applied to the employer’s portion of Medicare taxes. There were exceptions for certain employers, like severely financially distressed and recovery startup businesses. Employers also were subject to different rules for qualified wages depending on how many employees they had and during which quarter.
For example, in 2020, small and large employers were defined as having fewer or more than 100 employees, respectively. Small employers could apply the ERTC to all employee wages, whereas large employers were more limited. In 2021, this threshold increased to 500 employees.
A new addition in 2021, qualified recovery startup businesses could have claimed up to $50,000 in the third and fourth quarters– for a total possible benefit of $100,000. They must have started the business after February 15, 2020, and have had less than $1 million in sales or revenue. Small employers with less than 500 employees and tax-exempt organizations qualify.
Eligibility for ERTC in any quarter hinged upon the gross receipts test and full or partial suspension of operations. Those requirements, like the amount of the credit, changed several times but always involved an official notice to shut down or limit operations or business activities or a significant decline in gross receipts.
The gross receipts threshold for 2020 was 50 percent compared to the same quarter in 2019.
If the employer also claimed other COVID-19 relief funds, ERTC calculations would need to reflect those amounts to ensure applicable wages were not misappropriated.
Documenting ERTC Claims
Because the IRS can audit ERTC claims for up to five years after the return for that quarter was filed, employers need to keep detailed, thorough records.
In addition to documenting how the credits were calculated and allocated to each employee, employers also need to keep the following:
- Copies of all Forms 941, 941X, 7200 (form to request advance ERTC deposit), and income tax returns.
- Payroll records, such as employee count, staff schedules, time sheets, wages, health insurance information, and whether any employees are relatives of the owner.
- Data on any other federal COVID-19 relief programs accepted during 2020 or 2021.
- Copies of government shutdown orders, including those that directly impacted suppliers.
- Sales and revenue for the quarter in question and the corresponding previous period.
The Employee Retention Tax Credit offers compelling federal tax savings to eligible Denver organizations. Before attempting to file a claim, it is essential to consult with a qualified provider to guide you through the process. If you have questions about the information outlined above or need assistance claiming the credit or with another tax or accounting issue, Hanson & CO can help. For additional information, call 303-388-1010 or click here to contact us. We look forward to speaking with you soon.