The Coronavirus Aid, Relief and Economic Security (CARES) Act introduced the Employee Retention Tax Credit (ERTC) to help employers keep their employees on the payroll during the unprecedented effects of COVID-19. The ERTC is a refundable credit that companies can request on qualifying salaries, including certain health insurance costs, paid to employees. It is important to note that the ERTC is subject to income tax because the employer's total wage deductions are reduced by the amount of the credit. The IRS has protective measures to prevent wage increases from being counted for the credit once the employer is eligible to receive the employee retention tax credit. The IRS has also developed a plan to allow eligible businesses to receive an advance payment on their credit. This is intended to alleviate the liquidity problems of many companies that apply for the ERTC. Eligible wages under the ERTC for a small employer are all the salaries and health insurance benefits paid to an employee during the period in which the employer is considered an eligible employer.
The average number of full-time employees is important because this calculation determines what salaries would be available for credit. 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. Most employers, including colleges, universities, hospitals and 501 (c) organizations after the enactment of the United States Rescue Plan Act, may be eligible for credit. To apply for credit for previous quarters, employers must file Form 941-X, Employer Adjusted Quarterly Federal Tax Return or Request for Refund, for the applicable quarters in which qualifying wages were paid. Employers who use a Professional Employers Organization (PEO) or Certified Professional Employer Organization (CPEO) do not file an individual 941 on their behalf, so it's important that they understand how they would reconcile this information and receive credit. It's also important to note that there are membership rules that apply to commonly-owned businesses that could affect credit eligibility. The employee retention tax credit under the CARES Act encourages companies to keep employees on their payroll.
While the Employee Retention Tax Credit (ERTC) program has officially expired, this does not affect a company's ability to apply for the ERTC retroactively. Consequently, it is important to ensure that all eligible expenses, including non-payroll costs, such as utility, rent and operating expenses, to name a few, are included in PPP loan forgiveness requests in order to maximize the qualifying salaries available to the ERTC. The notice includes guidance on how employers who received a PPP loan can retroactively apply for the employee retention tax credit.