Employee Retention Tax Credit

COVID-19 has affected us all economically in some form or fashion, and this did not exclude small businesses across the country. In response to these troubled times, Congress approved the creation of the Employee Retention Tax Credit (“ERTC”) to encourage small businesses to retain their employees. This credit is a refundable tax credit available to many businesses in America.

However, deciphering whether you qualify for the ERTC can be daunting, which is why RJS LAW created this article to help you determine your eligibility to capture an ERTC on your next tax return. If your business is 1) an eligible entity to use this credit and 2) your business paid your employees “qualified wages,” you may be able to receive thousands of dollars for your business using the ERTC. 

Types of Eligible Entities

Under the original law, only operations that had 100 employees or less in 2020, or 500 employees or less in 2021, which were either fully or partially suspended due to a COVID-19 lockdown order; or, for any quarter in 2020, in which gross receipts were less than 50% of gross receipts for the same quarter in 2019, were eligible.

However, new ERTC guidelines enacted in 2021 update and reduce the gross receipts reduction amount from 50% to less than 80% of gross receipts for the same quarter in 2019.

This change enables many businesses that previously did not qualify for an ERTC credit to suddenly become eligible to take advantage of this credit.

This even includes businesses that received a Paycheck Protection Program I (PPPI) or (PPP II) loan.

For companies still not qualifying for the ERTC under the gross receipts reduction requirement, they may still qualify if business activities were “partially suspended” due to governmental orders limiting hours of operations, disrupting supply chains, restricting access to the workplace, limiting gathering sizes and/or requiring slowdowns for cleaning as well as other possible suspension scenarios.

Qualified Wages

Once it is determined that your business is eligible, the next step is to figure out whether your business distributed “qualified wages.” To evaluate this, it is important to know what is considered “qualified wages.”

According to the IRS, the definition of “qualified wages” depends on the number of employees you have. For example, if your business averaged more than 500 full-time employees in 2019, “qualified wages” are generally defined as wages that were given not in exchange for services. These types of wages include but are not limited to health care and wages given despite not providing services that benefits your business.

Meanwhile, if your business had an average of 500 or fewer full-time employees in 2019, “qualified wages” generally include any type of wage that was paid while the business was suspended. Not only this, but wages paid to employees during a quarter where there was a less than 80% gross receipt decline may also qualify as “qualified wages.”

Recovery Amounts

Once you figure out your business’ eligibility, and if it paid out “qualified wages,” the most difficult part of the ERTC is calculating how much of the credit you may qualify for. 

Under the original law, the amount of the ERTC was equal to 50% of the “qualified wages” paid to the employee, including the cost to continue providing health benefits to the employee. That amount was capped at $10,000 in “qualified wages” for all of 2020.

Now, the ERTC amount has increased to 70% of “qualified wages,” and the “qualified wages” are $10,000 per quarter instead of the entire year. However, this amount is capped at $21,000 for the whole year.

Overall, your business could receive as much as $26,000 per employee for years 2020 and the first three quarters of 2021. However, Start-up businesses could qualify for Q4 2021 ERTC if they meet certain requirements.

Questions

The ERTC can be very difficult to decipher and calculate, and RJS LAW and its qualified attorneys are available to assist in preparing and claiming your Employee Retention Tax Credit.  If you have any questions, please call today for a free consultation and assessment at 619-595-1655. You can also contact us via the web at www.RJSLawfirm.com. We look forward to hearing from you.

Published by Christopher Engelmann

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