How to Apply for Employee Retention Credit in 2023 Guide

BusinessTaxesERTC
9 min read

Learn how eligible businesses can retroactively claim the ERTC via form 941x, including those deemed essential or who had increased revenues. Rather than wait six to nine months to get refunded by the IRS, you can request an ERTC advance payment from a third-party lender using your your employee retention tax credits as collateral.

ERC Eligibility

According to the American Rescue Plan Act, to be eligible for the ERC, your trade or business must have been functional in 2020 and 2021. Private-Sector businesses and tax-exempt organizations who experienced the following are categorized as eligible employers who can claim the employee retention tax credit:

  1. Full or partial shutdown of operations resulting from a government order affecting travel, commerce or group meetings because of the covid-19 pandemic in 2020 or 2021.
  2. A decline in gross receipts during one of the 2020 calendar quarters amounts to less than 50% compared to that same calendar quarter in the 2019 calendar year. If it were a quarter in 2021, gross receipts would decline by less than 20% in contrast to the same quarter in the 2019 calendar year. 
  3. Recovery startup businesses established after Feb 15, 2020, with average annual gross receipts not exceeding $1 million, and is unable to meet any of the above requirements.
ERC Quiz Questions

Gross Receipts Test

Regarding the gross receipts test, eligibility requires that the business had experienced a more than 50 per cent decline in 2020, as opposed to the same quarter in 2019. 

For 2021, the requirement is that a business experienced a significant decline in gross receipts of over a 20 per cent when compared to the quarterly period of 2019. A recently established business that wasn’t existing in the particular quarter in 2019 is allowed to replace the matching quarter of 2020 for the contrast. For instance, if it was in third of fourth quarter in 2019, it should also be in third or fourth quarter in 2021.

Large Employers

Your business size is also a factor when qualifying as an eligible employer for the employee retention credit (ERC) where small and large businesses are not treated differently.

  • All Employee wages qualify for the employer credit in the case of employers with 100 or lesser full-time employees. This is regardless of if the Employer opens for business or is affected by the shutdown order enforced by any governmental authority.
  • Qualified wages for employers with over 100 full-time employees are wages paid to employees when they cannot provide services because of COVID-19-related circumstances. 

For 2021 claims, the number of required employees increased to 500 or fewer full-time employees. 

Refund Check

Depending on the amount of taxes withheld during this period, you can claim your fully refundable tax credit equivalent to 50% of qualifying wages up to a maximum of $5,000 per employee in 2020. 

You can receive a credit in 2021 of up to 70% of qualified wages paid to a maximum tax credit of $7,000 per employee quarterly. Three eligible quarters in 2021 means you can receive approximately $21 000, which, when added to your 2019 claim, will amount to a maximum credit of $26,000 per employee. 

How to Apply

The first step is understanding the above qualification criteria. The next is knowing how to apply through filing amended payroll tax returns. The tax form followed by the letter X that you usually use is what you will need here. Since most employers file these tax returns quarterly, the best choice is Form 941-X, the Adjusted Employer’s Quarterly Tax Return. However, Form 944-X is to be used by employers who file annually, and Form 943-x is farmers and agriculture busineses

Pre-Qualification

Although the criteria above are a form of guidance, you should master the pre-qualification to be on the safe side. Ensuring you’re qualified is the first step. A pre-qualification application will enquire about the number of your employees in 2020 and 2021 and if you experience a decline in gross revenues. Also, it would ask if your business experienced disruption due to COVID-19 or if your revenue declined. 

An example of business disruption is business closure. Supply chain problems are also another factor that can help you qualify. Before you start using the application, get ready all details concerning your gross receipts. Having these details on the ground will guide you to more accurate answers. 

Business Info

Although not all business qualifies, the Employee Retention Credit is accessible to all businesses in the United States. Have every information related to the business, as you will need to present that in the application process. Your business information is very vital to a successful application.

  • Business legal name 
  • Number of employees
  • Legal address and information

You will need to note every detail about your payroll software and the name of your payroll provider, especially if you are not working with an accountant or CPA. 

Employee Documents

The next step is to discover the number of W-2s issued in 2020 and 2021. You are eligible so far your business obeys Federal Insurance Contribution Act (FICA wages) under your employee’s wage structure. 

You may not qualify to claim the ERC if your business doesn’t pay an unrelated employee with a W-2 because it’s a refundable payroll tax credit. Qualifying wages are not ascribed to 1099 contractors, and most of their owner wages are also ineligible. 

If you are eligible, you must gather information for the full-time employees you employed for 2019. You will be required to provide their contact information as we as their full-time employment information starting from 2019. They will include the following:

  • Name and address of job location
  • The commencement and end date of employment with your small business

If an employee has already resigned from the company, ensure to get info on the exact date they stopped working for your small business. If previously filed a Form 7200 for reduced employment tax deposits, this also must be included.

Payroll Reports

The ERTC depends on the amount you paid to your employees in the quarters you qualify for the credit. To establish this fact, you will need to complete your employee payroll information. 

The report should indicate the amount of your employee’s gross pay for each quarter of 2020 and 2021 and the withheld amount for your payroll costs and taxes. Most of the popular payroll providers like Gusto, ADP, and QuickBooks can give this level of data export.

Bear in mind that there are a number of problems contained in the ERC, such as coordination with the Paycheck Protection Program (PPP) loans, qualification methodology, related health insurance costs, and controlled group criteria. If your payroll Services don’t provide you with all this information, it is best that you connect to an ERC specialist to avoid any problems in your application and also to make good use of the refundable credit.

PPP Loan Docs

Although obtaining a PPP loan does not hinder you from qualifying, but you cannot claim the credit on employee wages that you received PPP loan forgiveness for. Loans documents required would be ones that include

  • The date the PPP loan was issued
  • PPP loan amount

If your loan’s start and end dates will decide the quarters the loans apply to and how much of your loan forgiveness will count into your qualifying wages paid. 

Employer Tax Returns

Claiming the ERTC 2022 necessitates amends to your old Employer’s tax returns. Hence, you will need to provide copies of the original returns so that your accountant or CPA can reform them. Several employers use the Employer’s Quarterly Federal Tax Return form ( Form 941).

Form 944 (Employer’s Annual Federal Tax Return) is used by very small employers who pay below $1,000 in payroll taxes yearly. Farmers and fishers, on the other hand, may utilize Form 943( Employer’s Annual Return for Agricultural Employees).

For amendment, there is typically an X after the number to indicate an amended payroll tax return; examples are IRS Form 941-x, 944-x or 943-x. 

Sales Revenue

Finally, you will be required to gather all sales revenue from 2019-2020 for the Employee Retention Tax Credit. Your net income, your loss, and the number of your full-time employees will influence the calculation of the amount of the retention credit. 

Retroactively Claim

If your business is eligible, you can file a claim for a retroactive ERTC refund on  previous employee qualified wages paid for previous quarters through filing Form 941-X, a claim for refund or an adjusted quarterly employment tax return. 

Mistakes to Avoid

The ERTC is a complex credit that has been altered severally since its onset. Below are the common mistakes to avoid so as to get the most benefit during your application for this tax credit. 

Not Applying

The most significant mistake people make is not applying because they feel they might not qualify. Compile your quarterly profit and loss statements covering 2019, 2020, as well as 2021. Gather information concerning your operational business changes or business closures during COVID-19. Locate your payroll reports. All you need to work through the pre-qualification steps are the numbers from the paperwork you’ve gathered. 

Filing Deadline

This fully refundable tax credit is only available for a limited time, and you must submit your amended form 941s before the ERC deadline expires to not lose out on your  tax refund check.

While no official IRS notice has been posted on the exact filing dates for each eligible quarter, the IRS website states a maximum of up to three years to file form 941-x (Adjusted Employer’s Quarterly Federal Tax Return ) amendments.

Advance Pay

While the IRS stopped allowing severely financially distressed employers to request certain advance payments via Form 7200 (Infrastructure Investment and Jobs Act), many private financial institutions soon picked up the slack.

When using our preferred ERC advance lender, you can receive up to 70% of your ERC refund amount within 2-3 weeks rather than waiting 6-12 months for refund check to come in the mail

PPP Forgiveness

Initially, no concessions were made in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and business has to choose between the Paycheck Protection Program loans or employee retention credits. Since the Consolidated Appropriations Act, however , business owners who received PPP loan forgiveness can now also apply for the ERTC credit. No double-dipping of funds is allowed, but sizeable refunds are available to all eligible employers. 

Increased Revenues

You may think you can’t only qualify on shutdown orders if you look at revenue alone, even if, as an essential business, you turned s tidy profit. While you can qualify on the decline in revenue, you can as well qualify if you had to change operations or shut down due to COVID-19. 

Healthcare Expenses

The qualifying wages for this credit can be calculated using wages and the Employer’s portion of qualified health plan expenses.

Q4 of 2021

You shouldn’t apply for the last quarter of 2021 unless you are classified as a recovery startup business. The IRS states that only businesses that opened after Feb 15, 2020 can qualify for the ERTC as recovery startups.