Since many businesses remain eligible to retroactively claim Employee Retention Tax Credit for quarterly 2020 and 2021 tax submissions, it’s essential to understand what is needed to file, which employees are eligible, and how to calculate for qualified wages paid. With available credits as high as $26,000 per employee, accuracy and support can help your business maximize claims per employee and quarter, ensuring you receive the most ERTC funds available.
In this article, we’ll guide you through all major ERC eligibility requirements, which information/forms you’ll need to file, and how to begin calculating qualified wages to file a claim that benefits your business.
Deadlines and Organizational Eligibility
Before your business begins preparing documents and calculations to file an ERC claim, you should first determine your eligibility. The good news is that your businesses may qualify and the Infrastructure Investment and Jobs Act permits retroactive claims as late as mid-April 2024 and mid-April 2025 (for 2020 and 2021 claims, respectively).
Although this extra breathing room is helpful for organizations that need time to organize and file their claims, it’s important to remember that the IRS is likely to institute more stringent safeguards against fraud, particularly with recent GAO findings indicating that over 12% of ERC transactions were in error. That’s why we recommend enlisting support at the start of your ERC claim process to minimize the risk of IRS processing delays and increase the likelihood of an expedited claim.
In terms of organizational qualification, the guidelines are fairly straightforward. Businesses qualify for ERTC under any of the following circumstances:
- Full or Partial Suspension of Business Operations as a result of a government order. Although a full suspension is readily identifiable, qualifying under the definition of partial suspension requires a review of several factors. As a baseline qualification, your organization must have experienced at least a 10% disruption in revenue-creating operations (essential OR non-essential).
- Gross Revenue Decline in 2020 or 2021, which must be quantifiably proven through a comparison with 2019 gross revenue. The required percentages vary depending on the year and quarter of your claim.
- Qualification as a Recovery Startup Business, which applies to those who started a business after February 15, 2020 and who meet other gross receipt conditions. Qualifying businesses are eligible for up to $50,000 per quarter in the third and fourth quarters of 2021.
In terms of eligible date ranges for wage claims through ERC, these are dictated by the CARES Act, Consolidated Appropriations Act, the American Rescue Plan Act and other pieces of federal legislation. In general, eligibility dates range between March 13, 2020 to September 30, 2021 with a special window applying to Recovery Startup Businesses (July 1, 2021 to December 31, 2021).
For businesses who meet any of the three criteria listed above, there are causes for disqualification from ERC eligibility. If your business took a small business interruption loan under the Paycheck Protection Program (PPP), you are ineligible for ERC claims. However, other types of PPP loans do not necessarily disqualify you. Additionally, state and local government employers, as well as self-employed individuals without any employees are disqualified from receiving ERTC credit.
If your business is disqualified for any of the above reasons, remember that you could still qualify for other COVID-related tax credits, such as the Emergency Sick and Family Leave Tax Credit. This applies if any of your employees left work to care for themselves or loved ones due to COVID or if you paid employee sick leave wages between April 1, 2020 and September 30, 2021.
Qualified Wages + Sick or Tipped Wages
Qualifying wages for ERTC include full-time employees, part-time employees, qualified health plan expenses paid by the employer for employees, and employee pre-tax salary reduction contributions.
Additionally, any sick wages paid to employees (to provide care to themselves or loved ones) can be claimed as part of ERTC. Any FICA-compliant employee tips of over $20 per calendar month are also eligible as qualified wages for ERTC.
ERTC Calculations – Yearly Considerations
2020 employee retention tax credits are granted at a rate of nearly 50% of an employee’s qualified wages paid (with a maximum of $5000 per employee), while the rate is 70% for 2021 (with a maximum of $21,000 per employee for the first three quarters of the calendar year).
The size of your workforce also plays a factor in making calculations for each year. For businesses with less than 100 full-time employees in 2019, ERC claims can be made for all wage-receiving employees in 2020. For businesses with less than 500 employees in 2019, ERC claims can be made for all wage-receiving employees in 2021.
Which Forms You’ll Need and How to File a Claim
Once you’ve confirmed your business’ eligibility, assessed employee eligibility, calculated qualified wages, and accounted for other tax credits, you’ll need to prepare and file an amended Federal Quarterly Employment Tax Return, Form 941-X, for any applicable quarters between 2020 and the third quarter of 2021.
As a specific requirement of the ERTC program, these amended forms must be completed on paper and mailed to the IRS. Assuming your claim is error-free, you will receive a paper check from the IRS with your ERC funds included. The IRS is currently processing and disseminating ERC funds 5-9 months following the receipt of each quarterly claim, and this rate is expected to improve in the coming months.