What Is the Employee Retention Tax Credit (ERTC)?

Ever since the pandemic shook the world in March of 2020, businesses big and small have been working to survive the economic struggle that followed. As we have seen, the government has come up with a number of initiatives designed to mitigate the economic impact to businesses during the uncertain months and years that have followed.

One such government program has been the Employee Retention Tax Credit, or the ERTC for short. This tax credit in particular has changed a bit here and there since its introduction in 2020. So, if you have concern about what exactly that ERTC is, how it works, and whether or not your business might qualify for it, here’s the crash course in the Employee Retention Tax Credit you’ve been looking for.

What is the ERTC?

The Employee Retention Tax Credit is a tax incentive that encourages employers to keep their workers on payroll during the pandemic.

The Employee Retention Tax Credit is a tax incentive that encourages employers to keep their workers on payroll during the pandemic. It is a part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Originally, employers had to choose between a Paycheck Protection Program (PPP) loan or claiming the Employee Retention Tax Credit, or ERTC for short. But then a new law — the Consolidated Appropriations Act — changed that. Now even businesses that got a PPP loan can also benefit from the ERTC, plus the ERTC was eventually extended through Q3 of 2021 for most businesses (and through the end of 2021 for some startup businesses that meet certain requirements).

How does the ERTC work?

The ERTC is a refundable tax credit that, in total, allows businesses to subtract up to $26,000 per employee from their taxes. This number comes from a maximum credit of $21,000 per employee in 2020 and a maximum of $5,000 per employee in 2021.

The ERTC is a tax credit that only businesses can access, not individuals. It also only applies to employees on their payroll, not contractors or the like. Unlike tax deductions that reduce a business’s taxable income, the ERTC tax credit is subtracted from the amount of taxes that a qualifying business owes. This means that businesses that take advantage of the tax credit will owe less money in taxes because of it.

Because the ERTC is a refundable tax credit (rather than a nonrefundable or partially refundable tax credit), it means that any qualifying business can access the entire amount of the credit regardless of income or other tax liabilities.

The ERTC is a refundable tax credit that, in total, allows businesses to subtract up to $26,000 per employee from their taxes

Who qualifies for the employee retention tax credit?

Both private businesses and and tax-exempt organizations are qualified for the ERTC if they meet one of both of its criteria:

• The business had to suspend business activity, either partially or in full, because of local, state, or federal government orders.
• The business had a decline in gross receipts of 50% or more during any quarter of 2020 compared to 2019, and/or a 20% decline in gross receipts in 2021 compared to the same quarter of 2019.

If your business started in 2020, don’t worry. If you claim the 2021 Employee Tax Credit, 2020 will be the comparison period for your business.

It’s important to note that the ERTC is available to businesses of any size — there is no minimum or maximum constraints on the number of employees your business can have. However, it’s generally easier for smaller businesses to take advantage of the program.

Who is eligible for the employee retention tax credit for 2021?

For most businesses, you’re eligible for the 2021 ERTC if your business experiences a 20% decline in gross receipts in Q1, Q2, or Q3 compared to the same quarter in 2019 (or 2020 if your business started in 2020).

Certain startup businesses, however, are allowed to claim the ERTC for Q4 of 2021 as well, but you have to meet additional requirements. Generally, your business can claim the ERTC for Q4 if your business began operating after February 15, 2020 and your average gross receipts come to $1 million or less. If this is your business, good news: You don’t have to meet the criteria above regarding revenue decline or even the government shutdown requirements.

Can my business still claim the ERTC for 2020?

One of the best things about the ERTC is the time window it comes with. Unless the law changes in the future, businesses have up to 3 years from the sunset of the program (Q3 of 2021) to claim the tax credit on payroll tax returns.

In the end, the specifics of Employee Retention Tax Credit, like most tax-related things, vary depending on your specific business. While budgets are always tight, it’s a good idea to invest in the professional help of a qualified CPA or other tax professional to help you figure out exactly how the ERTC fits into your unique business and business plan.