How to Claim Employee Retention Tax Credit Retroactively

During the pandemic, many small businesses struggled to stay afloat due to business closures and enforced restrictions. However, ERTC came to the rescue courtesy of the IRS.

In March 2020, the scheme was brought about to help businesses with less than 500 employees to retain their current workforce and keep paying them, even if they weren’t able to complete their full working hours.

This was a massive win for businesses, as it meant that they could continue with the same employees, maintaining the expertise and training levels so that it was easier to start back up again without having to recruit and retrain after the restrictions were lifted.

Filling out the forms to claim the ERC can be complex and time consuming. There are specialist businesses such as ERC Benefits that can help companies get through the filing process

How Does ERTC Work?

Employee Retention Tax Credit is a credit that can be claimed from the IRS when filling in your standard tax return.

It allows businesses to claim up to 70% of the wages that they’ve paid out for each employee over the pandemic (2020-2021).

This is limited to the people that were kept on throughout the pandemic, meaning that businesses had to maintain the same employee levels throughout the pandemic to display that they were utilizing the money efficiently.

The money is also limited to small to medium businesses – this means businesses who employ up to 500 people. Any more than this and the company may not qualify.

What Does Employee Retention Tax Credit Mean for You?

The ERTC means that a business owner can claim back money that they already paid out for wages for their workforce. It will be received as a lump sum based on the employees that the business has kept on the books throughout the pandemic.

This means that the more people you paid wages to over 2020-2021, the more money you’ll receive to reinvest and grow your business.

How to Claim ERTC

Although the scheme ended in 2021, you can still claim retroactively right up until 2024, depending on when you pay your tax. To do this, you’ll need to use Form 941-X when you fill in your tax return.

There are some requirements and documents that will need to be provided, so it’s advisable to seek out professional help with this from your accountant, tax professional or payroll preparer.

How to Qualify for ERTC?

ERTC isn’t paid out to just anyone. There are certain criteria that you will need to meet as a business.

• ERTC is only paid out based on employees that aren’t covered by PPP. As a business, you can claim for both PPP and for ERTC – but not for the same employees.

• Businesses will need to show that the pandemic caused them financial damage. They will need to provide proof that there was at least a 20% deficit in their total earnings throughout the pandemic. This can be done via financial statements or forecasting models. If your business started up in 2020, meaning there are no prior financial statements, the IRS could accept predictions and forecasting models to show that the business hasn’t earned as much as expected. If you are in this position, it’s a good idea to seek advice from a tax professional. They will be able to point you in the right direction.

• Businesses will also need to show that they have maintained the same workforce throughout the pandemic. While these might not physically be the same people, they will need to be the same headcount. As the relief payment is to cover the wages of these individuals, the business will need to show that they still work there.

How Much ERTC Do I Get?

You can claim up to $10,000 per employee per quarter for Q1-Q3 of 2021 and up to $5,000 for 2020.

ERTC totals 70% of each employee’s total wage per quarter. So, if your employee earns $40,000 per year, you could receive $7,000 per quarter back to your bank account.

How to Spend ERTC

Employee Retention Tax Credit must be used to enhance business performance or to improve business practice or training. As this money has been provided as a relief payment in order to keep the business running, it must be spent by investing back into the business.

If the business has closed since the pandemic, this money may be inaccessible, as there would be no way to invest it back into the business.

Claimants should be aware that, if it is proven that the money was spent for personal gain in a later tax return, this may be requested as an extra tax payment. However, if you use the money correctly by investing back into the business, then you won’t need to pay a single dime back in.