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What is the Employee Retention Tax Credit All About?

Owning a business means that you typically do whatever you can to save a little money to buffer your profit margins. One scheme, which is shortly coming to an end is the ERC, known as the Employee Retention Tax Credit. It’s advisable for businesses to make the most of this before it ends in 2024.

Luckily, there are certain schemes that support businesses to help them make a little money back from certain aspects of the business.

What is Employee Retention Tax Credit?

Employee Retention Tax Credit is a credit that businesses are eligible to claim based on paying out certain types of eligible wages. This was introduced in 2020 to help support businesses that were struggling from the effects of the pandemic and may have had to reduce their business size, let employees go or close their doors altogether for a period. The amount that you can claim as a business entirely depends on how you claim.

CARES Act 2020

For qualifying wages, businesses can claim up to 50% or $10,000 of an employee’s wage paid between March 31st and December 31st, 2020, even if this wage was paid using a PPP (Payroll Protection Plan) loan.

Consolidation Appropriations Act 2021

Businesses can claim money back against 70% of an employee’s wages or up to $10,000 per quarter, whichever is lowest, even if the wages were paid using a PPP loan.

American Rescue Plan 2021

Businesses can claim up to $7,000 per quarter for an employee paid within 2021. However, due to the Infrastructure and Jobs Act introduced throughout that year, recovery start-up businesses could be eligible for a $50,000 claim if they paid out wages within quarters 3 and 4 of 2021.

The change here is because the American Rescue Plan now stipulates that credit can be claimed against Medicare rather than just against societal security as before. This means that any business that has employees eligible against Medicare can claim up to 50% back from June 2021 to December 2021.

How Can Businesses Claim ERTC?

Although the scheme has officially closed, businesses can still claim ERTC retrospectively up until 2024. This is to secure any benefit from over the Covid-19 pandemic when businesses are likely to have been most affected.

The IRS offers a guide under Notice 2021-20 on how to claim credit against wages from March 2020 – September 2021.

Businesses that received a PPP loan for assistance can also claim retrospectively right up until 2024 for any wages that were eligible during the covered period.

Which Employers Would Qualify for ERTC?

Due to the Consolidation Appropriations Act 2021, most businesses are now eligible to claim for credit – including those who took out a PPP loan.

There are two qualification requirements for the credit, which are:

  • The business must have been suspended or reduced due to government restrictions placed upon their particular service during the Covid-19 pandemic, therefore leading to a lack of earnings. This qualification point may rule out certain frontline or essential businesses such as healthcare or education establishments. This may also exclude some businesses that are registered in multiple countries if operations were able to continue elsewhere due to different restrictions being in place.
  • The business must be able to show a significant decrease in gross profits due to the loss of business hours or restrictions put in place. This may rule out businesses that were able to function online. While their service may have been affected, there’s the possibility that they were still able to make a similar profit by switching to online processes.

Which Wages Qualify for ERTC?

Any wages subject to FICA taxes or health expenses would qualify for the credit if they were paid to the employee between March 2020 and September 2021.

Do Tips Count?

Certain businesses may have employees working on a mainly tip basis. These include restaurants or bar services – largely businesses affected by the pandemic restrictions. In this case, any tips over $20 per calendar month can qualify for the credit.

Do Spouse Wages Count?

Typically, spouse wages do not count as being a business’ responsibility to claim. If your employees have spouses that also earn a wage that could qualify and this wage makes up the majority of the household income, the IRS does not see this as the responsibility of the business to claim and would be down to the employer of the higher earner. Therefore, spouse wages are not eligible.

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