Many employers have already claimed millions of dollars in tax credits through the Employee Retention Tax Credit (ERTC). Those employers that have not yet claimed (or incorrectly claimed) any ERTC may still do so retroactively by filing amended payroll tax returns for tax years 2020 and 2021.
Specifically, qualifying employers can claim the ERTC based on the qualifying wages they paid to their employees from March 13, 2020, through Sept. 30, 2021. A qualifying employer is one whose trade or business was fully or partially suspended during a calendar quarter due to governmental orders that limited commerce, travel or group meetings due to COVID-19.
If an employer's business operations continued, but the operations were subject to modification due to a governmental order (for example, to satisfy social distancing requirements), the modification can be considered a partial suspension of business operations if the required modification had more than a nominal effect on the business operations under all the facts and circumstances. Alternatively, a qualifying employer may be one that experienced a substantial decline in gross receipts or is a recovery startup business.
A recovery startup business is any employer that began business after Feb. 15, 2020, and had annual gross receipts under $1 million for the three year period before the calendar quarter for which a credit is determined.
Qualifying wages include wage amounts paid by the qualifying employer to its employees plus allocable health plan expenses. Qualifying wages are determined differently for large qualifying employers and small qualifying employers. A large qualifying employer is a qualifying employer for which the average number of full-time employees employed by the qualifying employer during 2019 was greater than 500. The threshold was one hundred employees for calendar quarters in 2020.
Large qualifying employers can treat wages as qualifying wages only for the time they are not providing services during the period in the calendar quarter for which the employer is considered a qualifying employer.
Small qualifying employers can treat all wages as qualifying wages during any period in the calendar quarter in which the employer is considered a qualifying employer.
Qualifying wages are capped at $10,000 per employee annually for 2020 and $10,000 per employee per quarter for 2021. The credit amount is 50 percent of qualifying wages in 2020 and 70 percent of qualifying wages in 2021. In effect, qualifying employers may be eligible for up to a $5,000 credit per employee for the 2020 tax year and up to $21,000 per employee in 2021 based on the amount of qualifying wages. Recovery startup businesses are limited to $50,000 in credit per calendar quarter.
Employers may still claim the ERTC retroactively by filing Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, for each quarter they paid qualifying wages. Employers may file Form 941-X up to three years after the original payroll taxes were due, which is typically on April 15. Thus, employers may claim the 2020 ERTC until April 15, 2024, and the 2021 ERTC until April 15, 2025.
Employers may want to consider reassessing their eligibility for the ERTC for the 2020 and 2021 tax years sooner rather than later. Employers might start with determining what type of impact COVID-19 governmental orders had on their businesses in 2020 and 2021. Employers may also want to consider revisiting their 2020 and 2021 financial statements to see if they experienced a substantial decline in gross receipts.
Once an employer has a basic understanding of whether it is eligible, then it may determine qualifying wages and calculate the credit amount.
Michael K. Mahoney is a shareholder in the Morristown, N.J. office of law firm Ogletree Deakins, where he is a member of the employee benefits and executive compensation practice group and the chair of the payroll tax and fringe benefits subgroup. Stephen Kenney is an associate attorney in the firm's Dallas office, where he advises on taxes that arise from the employer and employee relationship. © 2022, Ogletree, Deakins, Nash, Smoak & Stewart, P.C. All rights reserved. Republished with permission.
Related SHRM Articles:
IRS Update Clarifies Prescreening of New Hires for Work Opportunity Tax Credit, SHRM Online, October 2022
IRS Addresses Retroactive Termination of the Employee Retention Credit, SHRM Online, December 2021
Related SHRM Resource:
Employee Retention Credit (repealed effective 10/1/21), SHRM Express Requests