The Employee Retention Tax Credit (ERTC) is a program designed to help employers who have been affected by the pandemic. It is a refundable credit that can be used to reduce federal taxes and, in some cases, even result in a refund. To qualify for the ERTC, employers must have experienced a decline in business activity or a suspension due to government orders. The ERTC is available to employers with more than 100 full-time employees.
Qualifying wages include salaries and certain health insurance costs paid to employees. To apply for the credit, employers must file Form 7200 and Form 941-X, Employer's Adjusted Quarterly Federal Tax Return or Request for Refund, for the applicable quarters in which qualifying wages were paid. The United States Rescue Plan Act increased the employee limit to 500 to determine what salaries are applicable to the credit. If the employer paid its share of Social Security tax through federal deposits, then the non-refundable portion of the employee withholding tax credit can be recovered.
Companies can no longer pay salaries to apply for the employee retention tax credit, but they have until 2024 and, in some cases, 2025, to analyze their payrolls during the pandemic and apply for the credit retroactively by filing an amended tax return. When determining the qualifying salaries that can be included, employers must first determine the number of full-time employees. The notice includes guidance on how employers who received a Paycheck Protection Program (PPP) loan can retroactively apply for the employee retention tax credit. When you complete line 16 of Form 941, Form 941-SS, or Schedule B, you are accounting for the non-refundable portion of the credit.
If your company meets all of these criteria and was affected by a lockdown or a drop in revenues during the pandemic, you may be eligible for the ERTC. If you qualify for the ERC but didn't use it in previous returns and overpaid taxes, you'll need to modify your quarterly returns with Form 941-X. If the refundable credit exceeds the amount of tax you owe, you will receive the difference as a refund.