The Employer Retention Tax Credit: How to Know If Your Business Qualifies

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Posted on April 3, 2023 by James Gilmer in Business Compliance.

The Employer Tax Retention Tax Credit (ERTC) is the second largest small business stimulus program in U.S. history. Businesses that retained paid employees during the COVID-19 pandemic can apply for a refundable tax credit, or in other words, a refund on federal tax paid.

Businesses that were shutdown, impacted by government order, or lost revenues all may qualify. By filing amended tax returns, businesses can earn back up to $26,000 per employee, making the ERTC a highly attractive and beneficial offering.

Many businesses qualify for the ERTC and have yet to take the steps to do so. Since its initial release, the ERTC has been expanded, meaning more businesses qualify, including those that have received Paycheck Protection Program (PPP) loans.

Why should my business consider applying for ERTC?

The ERTC provides major tax relief for employees that lost revenue during the COVID-19 pandemic. It takes the form of a payroll tax credit equal to a percentage of eligible wages per employee.

Up to $5k/employee in 2020 + $21k/employee in 2021 = $26k. For example:

  • If you have 5 employees: (5 emp) * ($5k + $21k) = $130k 
  • If you have 50 employees: (50 emp) * ($5k + $21k) = $1.3M

In 2020, when the ERTC was first introduced, businesses could claim 50% of the first $10,000 in wages per W2 employee, or up to $5k/employee. Then in 2021, that number was increased to 70% of the first $10,000 in wages for each employee in every quarter. Put together, businesses can earn up to $26,000 per employee they kept on payroll during the pandemic. 

Businesses that obtained a PPP loan can still apply for ERTC, too. They simply have to avoid “double dipping” the wages they paid. A business can claim ERTC on wages as long as it didn’t use PPP money to pay for those same wages. Businesses can generally use PPP forgiveness funds towards other expenses, giving them more flexibility to report qualifying wages for ERTC. 

How does a business qualify for the ERTC?

It’s a myth that only businesses that were completely shut down by government order qualify for ERTC. Businesses that remained open, but faced shortened hours, supplier issues, and reduced receipts all may qualify.

Here are a few criteria to help you assess whether your business qualifies.

  • Business operations timeframe: The business carried on a trade or service from January 1, 2021, through June 30, 2021. Tax-exempt organizations also generally qualify.
  • Business size: When the ERTC was introduced, the business must have had 100 or fewer employees. That was changed in 2021, and now eligible employers must have 500 or fewer average full-time employees (FTEs).

Employers must also demonstrate “material impact” through one of the following tests: 

  • Reduced Gross Receipts Test: Employers must show a significant decline in gross receipts compared to 2019. If you’re applying today, you’d compare your 2020 receipts to your 2019 receipts. A business that experienced a  50% or greater decline in a given quarter in 2020 compared to the same quarter in 2019 might qualify. In 2021, that amount was reduced to 20% compared to the same quarter in 2020. And, businesses that hadn’t been formed in 2019 can use 2020 as the comparison year.
  • Government Order Test: The business must show a calendar quarter “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19.” 

The government order test is often misunderstood, meaning businesses that qualify for ERTC might not take advantage of it. Businesses can pass the government order test by demonstrating material impact, which is simply reduced operations. For example, the following might be considered a material impact on your business:

  • Any type of partial shutdown
  • Shortened hours due to curfews
  • Restrictions on in-person activities, such as diners or shoppers in a store
  • Impacts on your business because suppliers or other businesses shut down
  • Social distancing orders impacting capacity

Even if a business had strong receipts, it may be able to prove it was impacted by government orders. In any of the above examples, the rule of thumb is to keep thorough documentation. Businesses must keep a copy of any government order that impacted its operations, as they are generally subject to government audit for up to five years.

How are multi-location businesses affected?

Businesses with multiple locations and even multi-entity businesses must diligently keep track of how government orders and other restrictions impact their business, and to what extent. For example, one state or city may have had a shutdown order or social distancing restriction in place for weeks or months longer than another area. As a result, portions of your business may have faced longer impacts than others. However, careful documentation of these types of situations goes a long way in proving your case and protecting your access to ERTC.

Make Getting Your Employee Retention Tax Credit Easy

Applying for ERTC involves filing an amended tax return using Form 941-X with the IRS. To help review whether your business qualifies and files correctly, Harbor Compliance has teamed with Asure Software. Asure’s ERTC tax filing service calculates your refund and then files the amended tax returns on your behalf. Click here to get help calculating ERTC wages and filing your amended returns.

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© 2023 Harbor Compliance. Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency. NOTHING IN THIS COMMUNICATION CONSTITUTES LEGAL OR TAX ADVICE OR A GUARANTY OF ELIGIBILITY OF AN EMPLOYEE RETENTION TAX CREDIT. ELIGIBILITY DETERMINATIONS RELATED TO THE EMPLOYEE TAX RETENTION CREDIT ARE THE RESPONSIBILITY OF THE EMPLOYER.