Breaking Down the Employee Retention Tax Credit
Volumes have been written about the PPP loans that kept so many employers afloat during the pandemic. But there’s a lesser-known, yet equally potent federal helping hand that business owners should capitalize on — the Employee Retention Tax Credit (ERTC). The credit — which is designed specifically for employers who kept workers on their payrolls despite struggling through the pandemic — has been extended. You might be eligible to bank this hefty credit, but it won’t last forever and the time to act is now.
What Is the ERTC?
You might not be thrilled about having to learn another tax-related acronym, but for those who qualify, the ERTC is worth remembering.
“The Employee Retention Tax Credit is an incentive program enacted as part of Congress’s response to the COVID-19 crisis,” said Brent Johnson, co-founder and CEO of Clarus, a software R&D firm that specializes in tax credits. “It is intended to provide economic relief to employers whose operations were impacted by government orders associated with the pandemic, yet continued to pay employees. Although the Paycheck Protection Program has garnered more attention, in many industries the benefits associated with the Employee Retention Tax Credit can be as or even more significant than the PPP loans.”
Are the Rules the Same in 2021?
Many business owners let big money slip away in 2020 because they didn’t realize they were eligible for the ERTC or simply weren’t aware of it at all. Now, many others are leaving money on the table because they didn’t know the government changed the rules and expanded the population of eligible employers.
“In 2020, if an employer took a PPP loan, they were ineligible for the Employee Retention Tax Credit program,” Johnson said. “However, in December 2020 that restriction was removed retroactively to when the program was established in March 2020. This retroactive removal of a significant restriction on participation in the program creates a look-back opportunity for many small-business operators.”
Which Employers Are Eligible?
According to Johnson, an employer can become eligible for the ERTC in one of three ways:
- A full or partial shutdown due to a government order
- If the business experienced a significant decline in gross receipts
- If a small employer starts a new trade or business
Depending on your situation, qualifying for the credit can range from simple to simply frustrating.
“Sometimes eligibility can be quite easy to assess if your organization experienced a significant decline in gross receipts,” Johnson said. “Eligibility through a partial shutdown or assessing what constitutes a new trade or business can be more difficult to assess.”
The ERTC Is Temporary — Act Now
The ERTC has been expanded and extended, but don’t bet on another extension moving into 2022.
“The program has been extended through the end of 2021 when it will expire,” Johnson said. “However, claims can be made under the program so long as the statute of limitations remains open for the payroll return it is claimed on, generally three years from the date of filing.”
Clarus, Johnson’s company, helps employers secure the credit, which isn’t as well known as many of the other components of the federal COVID-19 stimulus programs.
“It’s not harder to claim than other credits,” Johnson said. “It’s just that Congress has never put in place programs like the Employee Retention Tax Credit and PPP program to get such significant dollars out to small and middle-market employers. It’s new and still unfamiliar to many people.”
The credit might be unfamiliar, but it is lucrative — and now is the time to take action.
“Take the time to assess your eligibility,” Johnson said. “The credit can create significant economics for your business if it’s eligible. For 2021, the credit is 70% of qualified wages; if you think your business will be eligible in the third or fourth quarter of this year, assess the situation now. Understanding your eligibility could help you be more competitive in a tight labor market or may help you accelerate hiring.”
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