The American Rescue Plan Act was signed into law to provide further support to employers affected by the COVID-19 pandemic. The associated ERTC qualifying period was extended through December 2021.

Employers of nearly every size and industry have faced economic hardship as a result of the health pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act was designed in large part to provide short-term incentives and over-time retrieved dollars in the form of tax credits to employers who, despite fully or partially suspended business activities, continued to compensate employees.

With extended deadlines approaching, claiming those credits today is rapidly becoming job #1 for businesses— and the last thing many employers want to think about as they manage their day-to-day operations in today's challenging environment.

When looking back means moving ahead

Earlier this year the American Rescue Plan Act was signed into law to provide further support to employers affected by the COVID-19 pandemic. The Employee Retention Tax Credit (ERTC), which had been scheduled to expire on June 30, was extended through December 2021. The credit percentage remains 70 percent of up to $10,000 in qualified wages per employee per quarter; i.e., a $21,000 maximum credit per employee for 2021.

According to IRS guidance, employers may qualify if their operation was at least partially suspended due to orders from a governmental authority related to COVID-19, or can demonstrate that gross receipts for a calendar quarter declined by at least 20 percent (generally compared to the same calendar quarter in 2019).

"For businesses of all sizes, these captured credits can make a big impact on their current year's bottom line," said Steven Bright, vice-president of business incentives with ADP. "Taking time to focus on the past will help businesses meet this year's goals."

Did you know?

  • The ERTC was also extended to new businesses which started after February 15, 2020, with average annual receipts of under $1,000,000. For such businesses, the amount of the credit may not exceed $50,000 per quarter.
  • The ARPA also enabled "severely distressed" employers — those that can demonstrate reductions in gross receipts of 90 percent or more, generally compared to the same calendar quarter in 2019. These organizations are permitted to take the ERTC for all wages paid to employees (up to the applicable limit), even if they have over 500 employees.
  • Otherwise, employers with over 500 employees can only take the ERTC for wages paid to employees for which an employee is not providing services (i.e., paid time off).

Facing challenges head on

While awareness is an important first step, capturing complex employee retention credits can be a heavy burden. While many employers may be eligible, many may also find it difficult to:

  • Determine company eligibility
  • Determine the correct tax credit amount available for each employee's wages
  • Identify eligible employees and determine how much of their wages qualify
  • Access and analyze months of payroll data
  • Allocate time to calculate and file for the tax credit
  • Reconcile estimates during your quarterly filings

Correcting ERTC misunderstandings

At first, this can feel overwhelming, and avoidance is a common reaction. Pursuing tax credits like the ERTC can be complex and takes significant effort to maximize the result. Importantly, few small-to-mid-sized businesses have the time, tools or expertise to identify where they were impacted, determining what the impact was and understanding how to calculate the benefit in the face of shifting requirements.

  • Critically, many don't believe they are eligible for relief-based tax credits associated with the pandemic either because they had previously received a forgivable loan under the Paycheck Protection Program (PPP) or didn't suffer a significant decline in gross receipts.
  • Furthermore, the evolving legislation and guidance surrounding the program have left businesses confused about whether they are qualified for the program.
  • With the signing of the recent infrastructure bill that changes the program end date from 12/31/2021 to 9/30/2021, many employers believe that the time to claim this benefit has closed as well.
  • Importantly, the end date for start-ups remains until 12/31/2021.

However, there's still time to get the support businesses need to process the credits quickly and easily. The ERTC can be computed retroactively with the refund secured by filing an amended Form 941-X. The key is understanding the unique ways business operations were impacted by governmental orders. Unfortunately, many lack the expertise in defining the multiple pathways to employer-level qualification.

Aside from a clear and definitive metric, the intricacies of gathering and parsing through payroll data, combined with multiple layers of company and wage qualification criteria, present a real challenge when it comes to calculating the credit once eligibility has been determined.

Because the required data flows through a variety of stakeholders, including HR, payroll, finance, and tax departments, a sharing of data, knowledge, and process is critical to ensuring that the right calculations are made without negatively impacting their broader tax strategy. There is a lot of work and some uncertainty involved. Employers need to clearly identify potential pathways towards employer eligibility prior to capturing employee level credit.

To get rolling, the business will need to identify ineligible, eligible and partially eligible employees (i.e., those working, but at reduced hours or a reduced rate). A team approach will help best determine qualified wages and credit eligibility by evaluating the business structure, locations, dates of impacted operations, and gross receipts. This will be invaluable when pursuing credit opportunities.

Transparency and a thorough analysis of the business's quarterly tax filing deposits will require critical assistance with completing either IRS Form 941 or 941X. And the business will also want someone keeping a close eye on things to provide periodic check-ins to discuss business operations, compare year-over-year gross receipts and prepare an audit-ready tax credit package.

Is your business unlocking the potential benefit of tax credits? Explore what ERTC credits your business may be eligible for.

Download our essential tax credit strategy guide to learn more.

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