The Employee Retention Credit (ERTC) is a refundable tax credit that companies can request on qualifying wages, including certain health insurance costs, paid to employees. The CARES Act and subsequent legislative changes have caused confusion surrounding eligibility for the ERTC, and it is important to analyze these complexities to determine eligibility and calculate an accurate credit. Unfortunately, there are certain types of businesses that do not qualify for the ERTC. Federal, state, and local government entities are not eligible to apply for the CARES Act or the ERTC.
Self-employed people are also not eligible for help, but there may be additional requirements that allow them to apply. Companies cannot pay salaries now to apply for their employee retention tax credit; however, they have until 2024 to review payroll during the COVID-19 pandemic and request it retroactively by filing an amended federal income tax return. If the credits exceed the full liability for the Medicare or Social Security portion, the deductible will be reimbursed to the employer. At the end of each calendar quarter, the amount of credits must be reconciled on Form 941 for federal payroll taxes.
Employers who obtained a Paycheck Protection Program (PPP) loan can now retroactively apply for their tax credit by filing Form 941-X, which is the employer's adjusted quarterly federal tax return for applicable quarters in which qualifying wages were paid. The IRS has provided three examples in their 57th FAQ section to help employers understand how to reconcile information and obtain credit. It is important to note that the rules clarified by the IRS apply to every quarter of the ERTC. Therefore, if wages were misclassified as salaries that qualify for the ERC, an amendment to Form 941-X must be filed in order to correct any inadvertent errors.
Employers who use a Professional Employers Organization (PEO) or a Certified Professional Employers Organization (CPEO) have not filed Form 941 on their behalf; thus, it is essential that they understand how to reconcile information and obtain credit. The IRS has published a guide that clarifies how all of this works. When the Coronavirus Aid, Relief, and Economic Security (CARES) Act was introduced, employers had the option of focusing on the previous quarter to determine eligibility requirements for the ERTC. Companies with more than 100 full-time employees can only use qualified salaries of employees who do not provide services due to suspension or decline of business activity.
It is important to have the right advice in order to fully and correctly document how your company qualifies for the ERTC. Eligible employers who choose to apply for their employee retention credit cannot apply for the same wage credits qualified for paid family medical leave.