The COVID-19 global pandemic has had a huge impact on the economy–not least affecting small businesses and startups. Many struggled to keep their doors open or were forced to close due to government mandates.
The employee retention tax credit (ERTC) was created to help keep companies afloat and jobs intact by increasing cash flow for small businesses. If your startup qualifies, you may still be able to claim payroll tax credits for 2020 and 2021.
In this article, we’ll explain what the ERTC is and who qualifies. You’ll also learn how to calculate and claim your share of the credit, whether your startup began operating before the pandemic or since it began. Let’s start with the basics.
What is the employee retention tax credit?
The ERTC is a refundable payroll tax credit companies can claim on eligible employee wages and healthcare costs. It applies to companies that suffered financially due to COVID-19. It was designed to reduce layoffs by offering relief for those who kept employees on the payroll through their financial hardships.
And even though it’s come to an end, it’s well worth exploring if you didn’t take advantage of it already. If you qualify, you can apply the rules retroactively. And save yourself from losing out on the chance for some financial relief.
The Coronavirus Aid, Relief and Economic Security Act
The credit was established in 2020 by the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed into law in March 2020. It allowed employers to claim a refundable payroll tax credit based on a percentage of qualifying wages—including employer health insurance costs. Employers could claim it quarterly to reduce taxes, or apply it retroactively to get cash refunds.
Amendments and expiration
The ERTC has been modified multiple times as the need for relief continued along with the pandemic. The credit was extended through the end of 2021. And amended regulations for 2021 include less stringent requirements for qualifying and a higher percentage of eligible wages.
A further amendment changed the expiration from December 31, 2021 to November of 2021. Thus it only applies to wages paid before September 30th, 2021.
However, you can retroactively claim the credits for the first three quarters of 2021 or all of 2020 if you haven’t already done so.
Does my startup qualify for the employee retention tax credit?
According to the original stipulations set up by the CARES Act, the ERTC was made available to companies that kept employees on the payroll and met the following criteria:
- Qualified as a small business
- Saw revenue reduced by 50% during any qualifying quarter of the year
- Were wholly or partially shut down due to a government order
Two subsequent Acts resulted in differences in qualifications and payouts for 2021 vs. 2020, and for “recovery startups.” Here’s how they work.
Qualifications for 2020
The ERTC applied to small businesses, defined as businesses employing 100 or fewer employees. To qualify for the credit based on lost income, the business needed to show revenue reduced by 50% or more from the same quarter in 2019.
They were allowed to claim the credit for qualified wages paid between March 13th and December 31, 2020. The credit could be claimed against 50% of qualified wages paid up to $10,000 per employee per year.
Qualifications for 2021
The Consolidated Appropriations Act (CAA) passed at the end of 2020 and the American Rescue Plan Act (ARPA), passed in March of 2021 expanded the ERTC. “Small business” was redefined for 2021 as any business employing 500 or fewer employees. The revenue loss requirement was decreased to 20% or more lower than the same quarter in 2019.
The credit limit was raised to 70% of qualifying wages. And the amount of wages that qualify increased to $10,000 per quarter of 2021.
Recovery startups
Additionally, ARPA added new eligibility for recovery startups. It allows businesses that started operations during the pandemic (and thus weren’t around in 2019) to compare 2021 earnings to revenue for the same quarter in 2020. And it permits qualified startups to claim credits for the third and fourth quarters of 2021.
Further, it allowed recovery startups to be eligible for relief even if they didn’t experience a government mandated shutdown or the required revenue decline if they
- Began operations after February 15, 2020
- Have an annual gross receipts of $1 million or less
How do I calculate credit value, and what's the maximum value I can get?
As we’ve shown, the credit limit and amount of qualifying wages changed from 2020 to 2021, and so calculations will be different for each year. You can determine the maximum credit value you get with the following information for each year.
Calculating credits for 2020
For full-time employees you retained between March 12, 2020 and December 31, 2020, the credit equals 50% of qualified wages up to $10,000. That means the maximum amount per employee is $5,000 for 2020.
Calculating credits for 2021
For wages paid between January 1, 2021 and September 30, 2021, the credit increased to equal 70% of qualified wages up to $10,000 per employee each quarter. That means you can claim up to $7,000 per employee per quarter, meaning you could claim a maximum of $21,000 per employee for 2021.
Recovery startups that qualify can apply the original expiration date (through the end of 2021), and claim credits for only the third and fourth quarters of 2020.
How do I claim the employee retention tax credit?
Advanced payment of the credits was available for qualified employers looking to boost cash flow throughout the year. You would have needed to fill out Form 7200, Advance of Employer Credits Due to Covid-19 at the beginning of the tax year.
Alternately, if you’re eligible, you could have claimed the new Employee Retention Credit by calculating your total qualified wages (including any health insurance costs) for each quarter. You then subtract that total from your deposit on Form 941, Employer’s Quarterly Federal Tax Return.
If you haven’t already claimed credits, you can do so retroactively by filling out Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the quarter or quarters in which you paid qualifying wages.
Claim your ERTC today with help from Fondo
Need help determining whether you qualify? Or don’t want to deal with the pain of applying and amending your tax statements? Fondo can help you apply for the credits.
We offer you a dedicated team to help your startup with taxes and bookkeeping so you can grow your business with more resources. Reach out to us at tryfondo.com to discuss your options today.
