If you’re interested in knowing about the eligibility criteria for ERTC, our guide will provide you with all the required information regarding this tax credit. Therefore, continue reading below for all relevant information.
It is fairly common for economic volatility to take a toll on the people within an economy. Apart from affecting personal financial conditions, various small to mid-size businesses take a hit due to economic downfall, and many dismiss their employees to cater to financial limitations.
To limit the repercussions of economic instability, Congress formed the Employee Retention Tax Credit (ERTC) to aid employers in securing certain payroll taxes. The process is much easier now, as businesses can get instant access to funds by seeking a prepayment from the Internal Revenue Service instead of applying for a payroll tax return to claim the ERTC (aka Employee Retention Credit or ERC).
The Infrastructure Investment and Jobs Act (IIJA) and ERTC Eligibility Criteria
Before examining the methods to claim your ERTC, let’s look into the Infrastructure Investment and Jobs Act. IIJA was passed by President Joe Biden and had the core purpose of updating and restoring infrastructure within the United States. Title VI states that other provisions within the IIJA bill cover the termination of the Employee Retention Tax Credit, particularly for employers who shut down amid COVID-19.
The next step involves revising the deadline to apply for the ERTC to October 1, 2021. On the contrary, start-up businesses in their recovery phase did not receive help from an extended deadline. Their first deadline of January 1, 2022 is still valid.
The Employee Retention Tax Credit
Put forth by the Coronavirus Aid, Relief, and Economic Security Act; the Employee Retention Tax Credit (aka Employee Retention Credit) has the core purpose of helping businesses sustain employees on their payroll. Other legislation laws, including the Consolidated Appropriations Act and the Rescue Plan Act, change and offer advanced payments and other forms of credit through FY 2021.
Although the expenditure on this halted in 2021, you still have the right to claim the credit. Therefore, the Employee Retention Tax Credit allows small to mid-sized businesses who meet ERTC eligibility criteria up to 50% of wages between March 13, 2020, and December 21, 2020.
According to the Consolidated Appropriations Act, employee wages are subject to payment by a rise of 70% for credit through the 4th quarter of 2021, which covers health insurance too. For the initial two quarters of the year, businesses have the liberty of using this credit for $10,000 at a maximum for each employee’s wage.
What Is The Eligibility Criteria For ERTC?
To be eligible for the ERTC, your business or non-profit organization must meet either of two core requirements within the calendar quarter for your credit usage.
The first requirement would be for your business to have taken a hit in partial or complete closure due to the government order implemented because of the pandemic. The second requirement is for your business to show a substantial fall in gross receipts.
Substantial Fall in Gross Receipts
There is variation in the meaning of a substantial fall between 2020 and 2021. In 2020, the requirement was for your business to have a minimum fall of 50% in the gross receipts for the particular quarter compared to the same quarter in the prior year, i.e., 2019. Additionally, the business should also have had 100 or fewer full-time employees.
For the fiscal year 2021, your business must have had a minimum fall of 20% in the quarter’s gross receipts compared to the same quarter in 2019. Therefore, the benchmark to compare remains 2019 in both scenarios. Additionally, the company must have 100 to 500 full-time workers. It is also important to note that both requirements do not include owners but only full-time employees within the business.
What Else Can You Do to Claim ERTC?
Apart from the needed percentage for decreases in the gross receipts, it is also essential for your full-time workers to meet the pre-set requirements of the Internal Revenue System’s description of a “full-time worker”. According to the IRS, the base requirement for a full-time employee is to work at least 120 hours per month or 30 hours a week.
The IRS lets businesses use their first quarter after the business started as the benchmark for their gross receipts. However, this is focused on businesses that were formed after 2019.
Two Business Options to Claim your Tax Credit
The core difference between ERTC and other tax credits for business owners is that in contrast to the latter, this does not operate as a write-off. On the other hand, the ERTC aids the business in decreasing its portion of its Social Security tax.
The two options for a business to claim their tax credit are:
- Use Form 941 to claim the ERTC and acquire a refund for the business’s previous tax deposits.
- Decrease the employee tax deposits by the percentage aligned with the ERTC.
Additionally, if the business’s expected credit exceeds its payroll tax deposits, it can benefit from the advance payment. However, to claim this, you may need to use Form 7200.
Since the ERTC tax expired on December 31, 2021, you may need to apply for a revised Form 941X to acquire your tax credit. Businesses can use this form to acquire tax credits that they were eligible for in the previous quarter but did not request.
The Connection Between the PPP Loan and the ERTC Eligibility Criteria
A common concern for business owners who have previously acquired a loan from the Paycheck Protection Program is whether they can claim the Employee Retention Tax Credit. Well, here’s the good news: you are eligible for the ERTC (aka ERC). However, the downside is that this won’t apply for salaries that were previously foregone or are expected to be foregone under the Paycheck Protection Program.
Let’s break this down further. Suppose you have received a PPP loan for $30,000 for salaries and are expected to be eligible for forgiveness. In that case, you will not be able to incorporate these wages into your ERTC calculation.
Claim Your Employee Retention Tax Credit
The ERTC’s core purpose was to aid sinking businesses in gaining access to capital quicker rather than having to wait for the upcoming year to apply. The ERTC eligibility criteria for this are fairly simple, and the result will benefit your business immensely. Therefore, file as soon as possible and claim your employee retention tax credit!