The Employee Retention Credit (ERC), also known as the Employee Retention Tax Credit or ERTC, is a refundable tax credit designed for eligible businesses and tax-exempt organizations that had employees and were affected during the COVID-19 pandemic. Here’s a detailed overview:
Overview
- Nature of Credit: It’s a refundable tax credit for eligible entities affected by the COVID-19 pandemic.
- Eligibility Period: The credit applies to qualified wages paid after March 12, 2020, and before January 1, 2022.
- Applicability: Specifically for businesses and tax-exempt organizations, not available to individuals.
Eligibility Criteria
- Shutdown Requirement: Businesses shut down by government orders due to COVID-19 during 2020 or the first three quarters of 2021.
- Decline in Gross Receipts: Those who experienced a significant decline in gross receipts during these periods.
- Recovery Startup Business: Entities that qualified as a recovery startup business for the third or fourth quarters of 2021.
Credit Calculation
- Percentage: Initially, it was 50% of up to $10,000 in wages per employee.
- Filing Amendments: Businesses can still file for the ERC in 2023 by amending past federal tax returns, despite the deadline ending on September 30, 2021.
Limitations
- Exclusions: The ERC cannot be claimed on wages that were accounted for in the Paycheck Protection Program loan forgiveness. Also, wages associated with shuttered venue operators grants or restaurant revitalization grants are excluded.
Claiming the Credit
- Adjusted Employment Tax Returns: Businesses that didn’t claim the credit with their original employment tax return can do so by filing adjusted returns, like Form 941-X, for the relevant 2020 and 2021 quarters.
- Wage Deduction Adjustment: If you claim the ERC, you must reduce your wage deduction by the credit amount for the same tax period, possibly necessitating an amendment to your income tax return.
Voluntary Disclosure Program
- ERC-VDP: This IRS program allows taxpayers who wrongly received the ERC to self-identify and repay it. The ERC-VDP is available until March 22, 2024.
This credit significantly impacted many for-profit and not-for-profit employers, both large and small, since its introduction under the CARES Act in March 2020. For more detailed and specific information, especially regarding your organization’s eligibility or the process of amending returns, consulting a tax professional or directly referencing IRS resources is advisable.