How to Claim the Employee Retention Tax Credit

How to Claim the Employee Retention Tax Credit (ERTC)



The effects of the COVID-19 pandemic were devastating for businesses. However, no one was affected as much as small businesses who are in a lot of ways still recovering from the major loss of revenue that resulted from multiple lockdown measures.

To help affected organizations stay afloat and start slowly recovering from the losses, the government implemented the Employee Retention Tax Credit.

Even though the pandemic is behind us, eligible businesses can still claim their credit. If you believe you’re one of them, you’ve come to the right place. In today’s blog, we’ll go over all the information you need to know to claim the Employee Retention Credit. 

What is the Employee Retention Tax Credit?

It is a payroll tax credit that qualifying businesses can claim by filing amended tax returns for affected quarters in 2020 and 2021. In contrast with other pandemic relief programs, the Employee Retention Credit is not a loan and you’ll never have to pay it back. 

Its purpose was to incentivize businesses to keep as many employees on their payroll during times of economic hardship. 

The best thing is that many employers are eligible for this credit. One of the requirements is that they must have partially or fully suspended their operations because of governmental orders, or experienced a drastic decrease in gross receipts during lockdown periods compared to the same quarters in 2019. 

What Are the Qualifying Amounts?

Depending on the qualifying wages, personal expenses, and health insurance costs, employers can recover varying amounts of credit. 

For eligible periods in 2020, the credit is equivalent to 50% of qualified wages with a limit of $10k per employee per quarter.

The qualifying amount was increased for 2021 to 70% with the wage limit remaining the same. 

How to Calculate the Employee Retention Tax Credit

Before applying for the credit you should first calculate the amount. This is very important as you’ll have to file the employee retention credit tax return (or more precisely, an amended tax return, but more on that later).

Start by calculating the number of employees who have received qualifying salaries during the eligible periods. Companies with under 500 employees can also claim credit for full-time employees who continue to work. 

Calculate the salaries these employees received as well as healthcare expenditure for each qualifying employee. Keep in mind that you can claim 70% of the salaries.

As we already mentioned, the maximum eligible compensation is $10k per quarter. 

Add up all the credit per employee and you’ll figure out the overall value of your tax credit. 

How to File an Employee Retention Credit Tax Return?

You can receive this credit by claiming it on your taxes, which you can do by filing an amended return. Here’s the breakdown of the entire process.

1. Gather all required documents

Start by preparing all the documentation. For an Employee Retention Credit, you’ll require:

• Trade name and Employee Identification Number (EIN)
• Payroll records for 2021 and 2020
• IRS Form 941 (completed for each qualifying quarter) 
• Tax return from the year 2019
• Forms 941-X which are used for filing amended tax returns
  
  

2. Fill out the forms

Fill out the required information in both forms (similar to what you always do when filing taxes) by using the amounts you calculated previously. Once all forms are completed, you have to submit the documentation directly to the IRS.

As we briefly mentioned, you’ll need separate forms for each qualifying quarter. In other words, if you’re eligible for the credit for Q1 and Q2 in 2021, you’ll need to complete two separate IRS Forms 941. 

3. Wait for the refund

Upon receiving your forms, the IRS will manually process your returns and you’ll receive the check in the mail.

However, since all forms are manually processed, expect delays. If you’re impatient, you can check the status of your application by calling the IRS helpline (1-800-829-1040). Before dialing the IRS, make sure you have your Social Security number at hand, as well as your tax return information and employer identification number (EIN).

If you don’t want to talk to the IRS directly (basically everything a Millennial taxpayer would like to avoid), you can check the Employee Retention Credit refund status online using the IRS’s Refund Status Tool. Follow the directions on the site to fill out the form properly - you’ll need the same information as if you were communicating with the IRS via phone. 

Why is the Employee Retention Credit Refund Taking So Long?

Because businesses can now retroactively claim this credit, all returns must be filed and processed manually. Since a return may include multiple pieces of paper, processing each claim can take a while. 

On average, the time that you receive this credit will vary depending on the circumstances. During 2022, it took four weeks on average for the credit to arrive. Today, there’s a massive backlog of claims the IRS has to handle, which increased the waiting time to almost six months, and in extreme cases to a year. 

Similarly, smaller refunds will take less time to process.

For example, for those expecting between $1k and $250k, the check may arrive in anywhere from three to ten months. 

For amounts over $250k, it may take over a year.

Regardless, patience is a godsend, and considering the amount, the wait is more than worth it. 

Why Hire a Professional to Handle Your Application?

The old joke of the IRS forcing us to calculate our own tax amount still applies to the Employee Retention Credit. Sadly, considering you need to take a close look at qualified wages and make comparisons between different quarters to see if you’re eligible, applying for this credit will be significantly harder.

Fortunately, here at Jostock & Jostock P.A., we specialize in business law and are more than competent in handling your Employee Retention Credit application. 

Not only is it easier for you, but because of our expertise and due diligence, we can even get you more money. More importantly, we can help make sure your application is perfectly legal and meets the confusing eligibility criteria established by the government. 

Minimize risk, and maximize your credit - fill out our contact form or call (239) 500-8822.

Note: The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.