Employee Retention Tax Credit
COVID-19 has affected us all economically in some form or fashion, and this certainly includes 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 is a refundable tax credit available to many businesses in America.
Deciphering whether your business qualifies for the ERTC can be a daunting process. RJS LAW created this article to help you determine if 1) your business qualifies as an eligible entity to use this credit and 2) if your business paid your employees “qualified wages” during the pandemic. If your business qualifies, you may be able to receive thousands of dollars from the Employee Retention Tax Credit program.
Types of Eligible Entities
Under the original law, only operations which were either fully or partially suspended due to a COVID-19 lockdown order and had 100 or fewer employees in 2020, or 500 or fewer employees in 2021; or experienced any quarter in 2020 with gross receipts of less than 50% of the gross receipts for the same quarter in 2019, were eligible.
Enacted in 2021, new ERTC guidelines updated and greatly reduced the gross receipts reduction amount from 50% to less than 20% of gross receipts for the same quarter in 2019.
This change enables many businesses that previously did not qualify for an ERTC to suddenly become eligible to take advantage of this excellent credit. This includes businesses that received a Paycheck Protection Program I (PPPI) or (PPP II) loan.
Companies not eligible for the ERTC using the gross receipts reduction requirement, may still qualify if their business activities were “partially suspended” due to governmental orders. RJS LAW will do a partial suspension analysis to see if your business qualifies. Additionally, eligibility was extended to companies with operations started after February 15, 2020.
Specifically, if a company started operations after February 15, 2020, the company is not required to meet the gross receipts reduction test nor does it need to have been “partially suspended.” The company would only need to average one million dollars or less in gross receipts. As applicable, the company would be able to claim up to $50,000 of the ERTC, and receive the ERTC for Q4 of 2021.
Once determined your business is eligible, the next step is to determine if your business distributed “qualified wages” to its employees. To evaluate this, it is important to understand what is considered “qualified wages.”
According to the IRS, the definition of “qualified wages” depends on the number of employees employed. For example, if your business averaged more than 500 full-time employees in 2019, “qualified wages” are defined as wages given not in exchange for services. These types of wages include, but are not limited to, health care and wages provided without providing services which benefits the 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 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.”
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 is available to your business.
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 employees. 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. The cap was also raised to $21,000 for the full year of 2021 only.
Overall, your business could receive as much as $26,000 per employee for years 2020, the first three quarters of 2021, and Q4 of 2021, if it qualifies as a start-up business
The ERTC can be difficult to decipher and calculate. The qualified attorneys at RJS LAW 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 may also contact us via the web at www.RJSLawfirm.com. We look forward to hearing from you and to getting your ERTC benefits.
Published by Christopher Engelmann