How to Apply for the Employee Retention Tax Credit
Navigate the complexities of the ERTC with clear guidance on amending past payroll tax filings to properly claim this valuable refundable credit.
The Employee Retention Tax Credit (ERTC) is a refundable tax credit for businesses that retained employees during the COVID-19 pandemic. The program is closed to new applications, as the filing deadline for 2020 claims was April 15, 2024, and the deadline for 2021 claims is April 15, 2025.
Citing widespread fraud, the IRS implemented a moratorium on processing new ERTC claims on September 14, 2023. The agency is now applying intense scrutiny to all pending claims. For businesses awaiting processing, the credit is claimed against certain employment taxes and does not need to be repaid.
Determining Eligibility and Credit Amounts
Eligibility for the ERTC covered wages paid from March 13, 2020, through September 30, 2021, though the fourth quarter of 2021 was only for “recovery startup businesses.” Qualification required one of two conditions per quarter.
The first was a full or partial suspension of operations due to a government COVID-19 order. The second was a significant decline in gross receipts. For 2020, this meant gross receipts were less than 50% of the same quarter in 2019. For 2021, the decline only needed to be 20% compared to the same 2019 quarter.
Qualified wages depended on employer size. For 2020, if a business had over 100 full-time employees in 2019, only wages paid to non-working employees qualified. For employers with 100 or fewer employees, all wages qualified. In 2021, the small employer threshold increased to 500 employees.
The 2020 credit was 50% of qualified wages, up to $10,000 in wages per employee for the year, for a maximum of $5,000 per employee. For 2021, the credit was 70% of qualified wages, up to $10,000 in wages per employee per quarter for the first three quarters, for a maximum of $21,000 per employee. Wages used for PPP loan forgiveness could not be used for the ERTC.
Required Documentation for an ERTC Claim
To substantiate a claim, businesses needed quarterly federal tax filings (Form 941), detailed payroll registers, and records of employer-paid pre-tax health plan costs.
Depending on the qualification method, businesses also needed financial statements to prove a revenue decline or copies of the government orders that caused a shutdown. Proof of 2019 full-time employee numbers was required to determine employer size. If a Paycheck Protection Program (PPP) loan was received, the loan forgiveness application was also necessary.
The Claim and Review Process
Claims were filed using Form 941-X, with a separate form required for each quarter. Due to widespread fraud, the IRS is now subjecting all claims to rigorous review, causing significant delays. The agency also established a withdrawal program for businesses that filed improper claims to avoid penalties.
Pending legislation could make any claims filed after January 31, 2024, ineligible for payment. The bill also proposes extending the statute of limitations for IRS assessment to six years, allowing more time for audits.