Enacted as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act passed in 2020, this tax credit provides employers up to $7,000 per employee per quarter in refundable tax credits for the first three quarters of 2021, as well as up to $5,000 per employee for March 13 through December 31 of 2020.
According to Rob Tiernan, Vice President at human capital management and tax incentive firm HIREtech, the ERTC presents a unique opportunity for businesses. “Over the last two years we have all been through things that I don’t think anyone could have imagined. The creation of the Employee Retention Tax Credit and the subsequent changes and expansion of the program have given businesses a tremendous opportunity to help them get back on their feet.”
While the Infrastructure Investment and Jobs Act effectively ended the ERTC at the end of September 2021 for most businesses, the good news for staffing owners is that that they have up to three years from the filing of Forms 941 (Employer’s Quarterly Federal Tax Return) to determine if the wages they paid from March 13, 2020, to September 30, 2021, are eligible.
“If you have not looked into ERTC for your business, there is still time to go back to 2020 and 2021, but you want to act sooner than later, as there are some time constraints approaching,” says Tiernan. However, because the ERTC is so often misunderstood, many businesses that are eligible to receive a tax credit aren’t even filing.
Am I Eligible?
Most employers, regardless of size, can qualify for the credit if they either:
- Were fully or partially suspended due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.
- Had a significant decline in gross receipts. This is defined as a decline of more than 50% for a quarter in 2020 as compared to the same quarter in 2019 or 20% of a quarter in 2021 (Q1 – Q3) as compared to the same quarter in 2019. Alternatively, for 2021, you can also compare the previous quarter to the one you are evaluating to the equivalent quarter in 2019. If you qualify under this method, the credit applies to the entire quarter.
There is an exception to qualification for entities of the government.
What Wages Qualify?
In general, the wages that qualify for ERTC are wages/compensation that are subject to FICA taxes, as well as qualified health expenses (medical, dental and vision). The wages must have been paid after March 12, 2020, and before October 1, 2021. The credit can only be taken on wages that are not forgiven under PPP.
For businesses with an average of 100 or fewer full-time employees in 2019, the company can capture almost all the wages in both 2020 and 2021 for the time period(s) the company qualifies for.
For businesses with an average of 500 or fewer full-time employees in 2019, the company can capture almost all the wages in 2021 for the time period(s) the company qualifies for. For example, if you had an average of 490 full-time employees in 2019 with an additional 200 part-time employees, then almost the entire payroll will be eligible for the ERTC.
For businesses with an average of more than 500 full-time employees in 2019, the tax credit is for wages paid to employees not working. There is no limit on the number of employees or the size of your company that prevents you from taking the credit.
The good news for staffing firm owners is that the end of the program does not impact your ability to retroactively claim ERTC. Staffing businesses have a minimum three-year statute of limitations from the filing of the Form 941 to conduct a lookback to determine eligible wages. The IRS released guidelines explaining that to claim credit for past quarters, businesses must file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarter(s) in which the qualified wages were paid.
Still Time to Claim Credit
If you have not taken advantage of the ERTC yet, you still have time to determine whether wages paid in 2020 and 2021 are eligible. If you think this might be the case, we suggest you talk with a qualified partner who can help you through the process.