employee retention tax credit (ERTC) is a tax incentive that was introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act to encourage employers to retain their employees during the COVID-19 pandemic. The credit was expanded and extended several times under subsequent legislation, including the Consolidated Appropriations Act of 2021, and is currently available until December 31, 2021. Many employers are unaware of the potential benefits of ERTC, particularly for Q3 2021, and thus miss out on significant tax savings.
ERTC is a refundable tax credit that can be claimed on quarterly employment tax returns (Form 941) or annual income tax returns (Form 1040). The credit provides eligible employers with a maximum of $5,000 per employee per quarter for wages paid between January 1, 2021, and December 31, 2021, subject to certain eligibility criteria. The credit amount is calculated as 70% of qualified wages, including health plan expenses, up to a maximum of $10,000 per employee per quarter.
To qualify for ERTC, an employer must meet one of two eligibility tests for a quarter:
1. Full or partial suspension test: The employer’s operations must be fully or partially suspended during the quarter due to a government order related to COVID-19, or the employer must experience a significant decline in gross receipts compared to the same quarter in 2019. A significant decline is defined as a decline of 20% or more for the first two quarters or 10% or more for the third and fourth quarters in 2021 compared to the same quarter in 2019.
2. Significant decline in gross receipts test: The employer must have experienced a significant decline in gross receipts for the calendar quarter compared to the same quarter in 2019. A significant decline is defined as a decline of 50% or more in gross receipts for Q1 2021, or 20% or more for Q2, Q3, or Q4 2021 compared to the same quarter in 2019.
Employers can claim ERTC for qualified wages that are not paid with proceeds from forgiven Paycheck Protection Program (PPP) loans. Employers can also claim ERTC for qualified wages paid to new hires who are considered “recovery startup businesses” and meet certain eligibility criteria.
There are several benefits of ERTC for employers in Q3 2021:
1. Cash flow improvement: ERTC is a refundable tax credit, which means that eligible employers can receive the credit as a refund if the credit amount exceeds their payroll tax liability. This can provide a significant cash flow boost for struggling businesses.
2. Cost savings: ERTC can help offset the cost of retaining employees during the pandemic, which can be particularly beneficial for businesses that are experiencing reduced revenue or financial hardships.
3. Simplified compliance: ERTC can be claimed on quarterly employment tax returns, which simplifies compliance compared to other tax incentives that require more documentation and recordkeeping.
4. Competitive advantage: ERTC can give eligible employers a competitive advantage in attracting and retaining employees, particularly during a tight labor market.
In conclusion, ERTC is a valuable tax incentive that can provide significant benefits for eligible employers in Q3 2021. Employers should review their eligibility and consider claiming the credit to help offset the costs of retaining employees during the pandemic and improve their cash flow. Employers should consult with their tax advisors to determine their eligibility and maximize their ERTC benefits.