Tax Credits

Employee Retention Credit Retroactive Claims (2023)

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An incentive that has garnered considerable attention in recent times is the Employee Retention Credit (ERC).

Introduced as part of the COVID-19 relief measures, the ERC provides a substantial boost to businesses by offering tax credits for retaining employees during challenging times. However, many organizations may not be aware that the ERC can be claimed retroactively, potentially unlocking a treasure trove of benefits. We delve into the realm of retroactive claims for the Employee Retention Credit, exploring how businesses can seize the opportunity to maximize their financial gains and navigate the complexities of the tax landscape with confidence.

What is Employee Retention Credit?

The Employee Retention Credit (ERC) is a valuable tax incentive introduced as part of the COVID-19 relief measures. Designed to help businesses weather the economic challenges posed by the pandemic, the ERC offers tax credits for employers who retained their employees during eligible periods.

Many businesses recognized the benefits of the ERC and took advantage of this credit in 2020 and 2021. Employers claimed the credit by filing Form 941, the Employer’s Quarterly Federal Tax Return, which allowed them to offset their payroll tax liabilities with the credit amount. This enabled businesses to improve their cash flow and alleviate the financial strain caused by the pandemic.

If your business has not yet claimed the ERC, it’s not too late. The IRS has extended the deadline for retroactive claims until 2024, providing a significant window of opportunity. Moreover, certain businesses severely impacted by the pandemic, such as those with suspended operations or experiencing significant revenue decline, have until 2025 to claim the credit.

Retroactively Claiming Employee Retention Credit

To maximize your chances of benefiting from the Employee Retention Credit (ERC), it’s crucial to understand the timeline for retroactive claims. You have a window of three years from the date you filed the applicable tax return or two years from the date you paid the tax, whichever is later, to claim the ERC retroactively. This means that for the tax year 2020, you potentially have until 2024 to submit the necessary form to the IRS, while for the tax year 2021, you may have until 2025 to secure the tax break.

It’s important not to delay in claiming the ERC once you determine your eligibility. While you do have a specific timeframe, it’s essential to act promptly. Submitting Form 941-X, the necessary form for retroactive claims, in a timely manner will ensure that you receive the tax credit as soon as possible, providing valuable financial support for your business during these challenging economic times.

If you have any questions or uncertainties regarding the ERC or how to go about claiming your tax credit, it is highly recommended to consult with an ERC professional. Their expertise and guidance can help you navigate the intricacies of the process, ensuring that you take full advantage of this beneficial tax incentive and strengthen the financial resilience of your business. Don’t hesitate to seek professional assistance to make the most of the Employee Retention Credit.

Eligibility & Qualification

To qualify and be eligible for the ERC, there are requirements set by the IRS that your business must meet. Originally, there were only a few, but as new legislations got passed, a few more requirements have been added. At first, in order for your business to be eligible, the requirements are as follows:

  1. Full or partial suspension:
    • Businesses that were fully or partially suspended by a government order due to COVID-19 were eligible for the ERC during the period of suspension. This includes mandatory closures or significant restrictions on operations imposed by state, local, or federal authorities.
    • Examples of eligible businesses include restaurants, bars, entertainment venues, gyms, and other establishments that faced government-mandated closures or restrictions.
  2. Significant decline in gross receipts:
    • Businesses that did not face full or partial suspension could still qualify for the ERC if they experienced a significant decline in gross receipts.
    • In 2020, businesses qualified if their gross receipts for any calendar quarter were less than 50% of the gross receipts from the same quarter in 2019.
    • Once a business’s gross receipts for a quarter dropped below the 50% threshold, it remained eligible for the ERC for subsequent quarters until its gross receipts exceeded 80% of the gross receipts from the same quarter in the prior year.

After that, there have been a few more added to the list.

  1. Businesses that obtained a Paycheck Protection Program (PPP) loan.
  2. Employers that commenced operations on or after February 15, 2020, with average annual gross receipts under $1 million, commonly known as Recovery Startup Businesses.
  3. Companies that faced a significant decline in revenue.
  4. New employers, including those that were not operational for all or part of 2019, but met the eligibility criteria for the credit.
  5. Employers that experienced a complete or partial shutdown due to COVID-19 or encountered a qualifying decline in their receipts in 2021.

Qualified Wages

Qualified wages refer to the compensation you provide to your employees, including tips subject to FICA tax, and also cover qualified health plan expenses linked to those wages. To be eligible for the Employee Retention Credit (ERC), these wages must have been paid to some or all of your employees between March 13, 2020, and September 30, 2021 or December 31, 2021, depending on the businesses.

The number of full-time equivalent (FTE) employees you had in 2019 will determine the amount of qualified wages. Notably, recent legislation expanded the small employer threshold from 100 FTE employees to 500. As a result, employers with up to 500 FTE employees in 2019 can claim the ERC for 2021 on wages paid during working or non-working periods.

If you have fewer than 500 employees, you can claim the credit even if your employees are currently working. However, if you had more than 500 full-time equivalent employees in 2019, the credit can only be applied to wages paid to an employee while they were not performing services for your organization.

It’s important to note that you can only consider a portion of wages paid to full-time employees in a qualifying quarter if you experienced government-mandated closures or significant losses in gross receipts. Additionally, for the year 2020, the maximum credit limit per employee is $5,000, while it increases to $21,000 for 2021.

Form 941-X

To claim the Employee Retention Credit (ERC) for a specific quarter, you will need to file an amendment to your original quarterly tax return using Form 941-X. This form serves as a revision to the initial submission and allows you to accurately report and claim the ERC for the applicable quarter.

There are five parts to Form 941-X, and to fill it out, you’ll need your EIN, Name, Trade Name, Address and the corrected amount for all qualified wages. It’s important to note that a separate Form 941-X must be filed for each quarter you are seeking to claim the ERTC. By completing and submitting the necessary Form 941-X for each qualifying quarter, you can ensure that your ERC claim is properly documented and processed by the IRS.

Summary

The Employee Retention Credit is a valuable tax incentive designed to support businesses during challenging times. It provides tax credits based on qualified wages paid to employees, and businesses have the opportunity to retroactively claim the credit. If your business has not yet claimed the ERC, there is still time, as the deadline for retroactive claims is until 2024, and for some businesses, it extends until 2025. It’s important to determine your eligibility and act promptly to claim the ERC, as it can provide significant financial benefits and help your business stay strong in the face of economic difficulties. Seek professional assistance if needed to ensure accurate and successful retroactive claims. Don’t miss out on the opportunity to unlock the benefits of the Employee Retention Credit and navigate the tax landscape with confidence.