What Is the RTC Tax Credit? A Look at the ERC Program

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that retained and paid employees during the COVID-19 pandemic to help with the cost of keeping staff on payroll. Many individuals searching for “RTC tax credit” are often looking for information on the ERC, as “RTC” is a common typographical error. The credit applies to qualified wages paid between March 13, 2020, and September 30, 2021, for most businesses. The rules and credit amounts differ significantly between 2020 and 2021.

Employer Eligibility Requirements

An employer’s eligibility for the Employee Retention Credit hinges on meeting one of two specific tests for a given calendar quarter. The first test involves a full or partial suspension of business operations due to a government order. This order must have limited commerce, travel, or group meetings due to COVID-19. An example would be a restaurant mandated by a local government to close its indoor dining services, even if it could continue offering takeout or delivery.

The second pathway to eligibility is a significant decline in gross receipts, and the definition of this decline varies by year. For 2020, a business qualifies for the quarter in which its gross receipts were less than 50% of the gross receipts for the same calendar quarter in 2019. Qualification continues until the first quarter where gross receipts exceed 80% of the same quarter in 2019.

For 2021, the threshold was lowered, making it easier for businesses to qualify. An employer could be eligible if their gross receipts for a quarter were less than 80% of the gross receipts for the same quarter in 2019. The 2021 rules also introduced an alternative quarter election, allowing employers to use the gross receipts from the immediately preceding calendar quarter to determine eligibility. For instance, to determine eligibility for the first quarter of 2021, a business could compare its gross receipts from the fourth quarter of 2020 to the fourth quarter of 2019.

Calculating the Employee Retention Credit

Once an employer confirms eligibility, the next step is to calculate the credit amount. The calculation is based on “qualified wages,” which include an employee’s gross wages and certain employer-paid health plan expenses. The rules governing the amount of creditable wages and the credit percentage changed from 2020 to 2021.

For wages paid in 2020, the credit is calculated as 50% of qualified wages. There is a cap on the amount of wages that can be considered for the calculation; the limit is $10,000 in qualified wages per employee for the entire year. This results in a maximum possible credit of $5,000 per employee for all of 2020.

The rules became more generous for 2021. For wages paid during the first three quarters of 2021, the credit amount increased to 70% of qualified wages. The wage limitation also changed, applying on a quarterly basis instead of annually. This allows an employer to claim the credit on up to $10,000 in qualified wages per employee, leading to a maximum credit of $7,000 per employee, per quarter.

A factor in the calculation is the interaction with the Paycheck Protection Program (PPP). An employer cannot use the same wages to calculate the ERC that were paid for with funds from a forgiven PPP loan. This prevention of “double dipping” requires careful record-keeping to segregate the wages used for each program.

How to Claim the Credit

To claim the Employee Retention Credit, employers must gather documentation to substantiate their eligibility and credit calculation. This includes detailed payroll records that identify the qualified wages paid to each employee. Businesses also need financial statements showing the quarterly gross receipts or copies of the specific government orders that caused a suspension of operations.

The credit is claimed retroactively by filing Form 941-X, Amended Employer’s QUARTERLY Federal Tax Return or Claim for Refund, for each eligible quarter. On this form, the employer will adjust the previously filed Form 941. The preparer must report the nonrefundable and refundable portions of the credit and provide an explanation of how they determined eligibility and calculated the credit amount.

Businesses must be aware of the deadlines for filing a retroactive claim. The deadline for claims from the 2020 tax year was April 15, 2024, while the deadline for 2021 claims is April 15, 2025.

After completing the Form 941-X for each applicable quarter, the forms must be mailed to the IRS service center for their business location. Claiming the ERC requires an employer to reduce their income tax deduction for wages by the amount of the credit received, which may necessitate filing an amended income tax return.

Due to a surge in fraudulent submissions, the IRS implemented a moratorium on processing new ERC claims beginning September 14, 2023. This pause on new claims was to give the agency time to combat fraud. While the IRS has resumed processing claims filed before the moratorium, all submissions face increased scrutiny and longer processing times.