What is Employee Retention Tax Credit and How Can It Help Your Business?

The U.S. Small Business Administration's Paycheck Protection Program (PPP) and Economic Injury Disaster Loans (EIDL) were a financial lifeline to many companies during the early stages of the COVID-19 pandemic. These programs awarded eligible employers grants and loans that allowed them to cover employee payroll and other expenses to aid with job retention and avoid business closure. While many businesses took advantage of the limited funds offered through these programs, some were unable to submit their applications before the funds were depleted.

Businesses now have additional financial recovery options. The Employee Retention Tax Credit provides a pool of funds businesses can use as they work to rebound from the economic impact of the global pandemic. Best of all — funds can be used for any business-related expenses!

What is Employee Retention Tax Credit (ERTC)?

The Employee Retention Tax Credit is a refundable federal income tax credit that gave businesses the ability to recoup employee wages and health insurance costs, up to $21,000 per employee for the calendar year 2021 and $5,000 per employee for 2020 still. ERTC first appeared as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March of 2020, then was amended by the Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act), and then the American Rescue Plan (ARP) Act of 2021.

The signing of the Infrastructure Investment and Jobs Act in 2021 reduced the period that the program applied to by eliminating the fourth quarter of 2021 for most businesses. Fortunately, eligible businesses can retroactively claim ERTC based on the periods for which qualified wages or expenses were paid. The credit maximums are also influenced by these timeframes.

NOTE: The total amount you receive is taxed as regular business income.

How is this program different from PPP and EIDL?

Unlike prior government assistance programs, ERTC does not require that you use proceeds for specific business expenses but simply have qualifying wages paid on a W-2. Similar to other programs, access to these funds will eventually end. The program has been amended several times, including allowing eligible Recovery Startup Business employers to apply for quarterly tax credits for the periods ending September 30, 2021, and December 30, 2021.

Do I qualify for ERTC?

Several tests are used to determine whether you meet tax credit eligibility, with two primary tests. One, if you had a decline in gross receipts from the reference period, and the second if you had significant governmental restrictions on how COVID-19 affected your business operations. Most major payroll systems do not automatically check your eligibility or request credit on your behalf as they do not have the information needed to determine eligibility. You also can not use the same wages paid for PPP loan forgiveness and ERTC refunds. A careful analysis is needed to maximize the potential credits and refunds.

If you use QuickBooks, ADP, or Paychex, you will need to manually apply for this credit on your own. Unless your CPA handles your quarterly federal tax returns or weekly payroll, they are also likely to overlook this tax benefit.

How can I claim an ERTC?

Eligible businesses can claim this payroll credit for past eligible calendar quarters by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund with the Internal Revenue Service.

We’re here to help! Speak with a Town and Country Bank and Peoples Prosperity Bank Commercial Banker today, who can help you review the IRS's Employee Retention Credit - 2020 vs. 2021 Comparison Chart along with your financial details to confirm your eligibility.