Since the employee retention tax credit (ERTC) was first introduced by the CARES Act in March 2020, ERTC has resulted in large tax refunds for many business owners that had experienced a substantial decrease in their gross revenue at some point since the pandemic started. There have been various extensions and enhancements to the program since its enactment. Below is a summary of the major updates that have been made to ERTC since our last update.
- ERTC is currently still available through the end of 2021. While there have been rumors that President Joe Biden’s Infrastructure Bill would cancel ERTC for 4th quarter 2021, ERTC is currently still available for this quarter until further notice.
- A “recovery startup business” is eligible for ERTC credits up to $50,000 per calendar quarter starting in 3rd quarter 2021. A “recovery startup business” is one that:
- Began operations after February 15, 2020
- Whose average annual gross receipts for a 3-txable-year period which precedes such quarter does not exceed $1 million; and
- Experiences a full or partial suspension of operations due to a governmental order or experiences a significant gross receipts decline
- When ERTC was first introduced under the CARES Act, it stated that an employer’s deduction for qualified wages must be reduced by the amount of the ERTC that is claimed. The Internal Revenue Service (IRS) stated that the timing of the reduction must occur in the applicable taxable year in which ERTC was claimed; this is regardless of when the business owner filed the ERTC claims or received the ERTC refund from the applicable tax year.
- The IRS clarified that tips received by an employee in the regular course of employment are considered to be qualified wages for purposes of ERTC even though they were not funded by the employer. In addition, restaurant owners claiming the FICA Tip Credit on their share of the Social Security and Medicare taxes on these tips can claim both ERTC and the FICA Tip Credit.
- Employers are allowed to use the alternative quarter election to determine whether there has been a decline in gross receipts for purposes of ERTC in a calendar quarter of 2021 (e.g. a business owner can qualify for ERTC in 1st quarter 2021 if gross revenue in 4th quarter 2020 is down at least 20% compared to 4th quarter 2019). The IRS stated that the alternative quarter election does not have to be used consistently to qualify for ERTC in each quarter of 2021.
If ERTC was not claimed on the originally filed quarterly employment tax returns (Form 941) in previous quarters, employers can still claim ERTC by filing an amended quarterly employment tax return (Form 941X).
Business owners should consult with their tax accountants to determine their eligibility for the ERTC.