2023 employee retention credit requirements
Employee Retention Credit Requirements
To qualify for the Employee Retention Credit, only one of two tests needs to be passed. The first is the Gross Receipts Test, and the second is the Government Mandate Test. While a Certified Public Accountant (CPA) can usually handle the Gross Receipts Test, it’s worth noting that this test is more comprehensive in nature and often requires the expertise of a Tax Attorney or consulting firm.
Employee Retention Credit Requirements - The Two Tests
Your business needs to pass one of these tests to qualify.
How the Government Mandate Test works
This applies to both 2020 and 2021.
The Government Mandate Test is frequently the most underutilized and misunderstood aspect of the ERTC Credit. This is because it does not fall under the purview of traditional accounting tasks, making it challenging for most CPAs who do not specialize in ERTC to assess their clients’ or businesses’ eligibility.
It’s important to understand that the Government Mandate Tests, or the “full or partial suspension of operations” (FPSO) test is not based on financial statements. In other words, a business does not need to demonstrate any decline in gross receipts to qualify under the FPSO test.
Congress established this test because they recognized that COVID-19 has impacted businesses in a multitude of ways, some of which are not easily reflected in gross receipts. Even profitable businesses may have faced difficult decisions about employee retention due to pandemic-related changes.
For instance, a company may have experienced success in one line of business but not in another, leading to an overall increase in revenue while certain areas suffer. The goal of the ERTC is to incentivize the retention of employees in both profitable and non-profitable businesses, acknowledging the complexities of pandemic-related challenges.
What if you weren’t materially impacted by a government mandate?
It’s important to note that the IRS deliberately chose the phrase “more than nominal” when defining the FPSO test, indicating that even minor operational changes and restrictions could potentially qualify a business for ERTC eligibility. The use of this language is significant because the IRS did not establish a more substantial threshold, such as “substantial” or “material,” which may have suggested that a major impact is necessary.
As a result, even minor operational disruptions could potentially substantiate ERTC eligibility. Despite the clear guidance provided by the IRS in Notice 2021-20, we have observed that many businesses (and their CPAs) wrongly assume that they are ineligible for the ERTC because they did not experience a quarter-over-quarter decline in revenue. It’s important to fully understand the criteria for ERTC eligibility and to seek expert guidance if there is any confusion or uncertainty.
Here’s why CPAs typically cannot administer this test
CPAs and taxpayers typically prefer empirical, quantitative, and objective tests when it comes to tax requirements. The “significant decline in gross receipts” (SDGR) test is a relatively straightforward accounting exercise that leads to clear, definitive conclusions. In contrast, the FPSO test is a “facts and circumstances” based test, which is subjective in nature and may involve interpretation. This type of analysis can be challenging and is not typically encountered by traditional CPAs.
However, there are other long-standing “facts and circumstances” based tests in the Internal Revenue Code, such as determining whether a legal entity or individual is operating a “trade or business,” or whether an organization qualifies as a “public charity.” While these tests may be subjective, they are a necessary part of tax compliance and should be approached with care and attention to detail.
A note about Safe Harbor
The IRS often includes “safe harbors” as a complement to the facts and circumstances-based tests in the Code. These legal provisions offer a way to reduce or eliminate liability and uncertainty in subjective tests by providing a supplemental definition that relies on quantitative, objective measurements. Consider the IRS’s clarification of the FPSO test for businesses that were required to modify their operations due to a governmental order, such as social distancing, enhanced sanitation, and COVID-19 infection protocols.
In one sub-definition of the FPSO test, the IRS stated: “Whether a modification required by a governmental order has more than a nominal effect on the business operations is based on the facts and circumstances. A governmental order that results in a reduction in an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10 percent will be deemed to have more than a nominal effect on the employer’s business operations.”
While the first sentence above indicates that this is a facts and circumstances-based test, the second sentence provides a safe harbor test that allows taxpayers to use empirical data to support their claim that they have met the FPSO test requirements. Safe harbors like these can be a helpful tool in navigating the complexities of the tax code and can provide a greater degree of certainty and clarity for taxpayers.
IRS Resources:
How the Gross Receipts Test works
2020 Requirements:
A decrease of more than 50% compared to the same quarter in the prior year.
Employers may claim the ERTC for each eligible employee for all calendar quarters, with a maximum amount of qualified wages per employee of $10,000. The maximum credit for an employer who qualifies for the ERTC is 50% of the first $10,000 in qualified wages, up to $5,000 per employee.
For employers with more than 100 full-time employees in 2019, qualified wages are generally those wages paid to employees not providing services due to full or partial suspension of operations or the decline in gross receipts.
For employers with 100 or fewer full-time employees in 2019, qualified wages are generally those paid to all employees during a period of full or partial suspension or during the quarter in which the employer suffered a decline in gross receipts, regardless of whether the employees provided services.
For both large and small employers, “wages” are defined as taxable wages, including certain contributions to health benefit plans.
It’s important to note that there are additional rules and requirements to qualify for the ERTC. Employers should consult with a tax professional or refer to official IRS guidance to ensure they meet all necessary criteria.
2021 Requirements:
A decline in gross receipts in the first, second, or third calendar quarter of 2021, where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019.
For the calendar year 2021, eligible employers can claim a credit of up to 70% of qualified wages paid to employees between Jan. 1, 2021, and before Oct. 1, 2021. The credit is equal to 70% of the first $10,000 in qualified wages per quarter, meaning that employers can receive up to $7,000 per employee per quarter. Therefore, an employer who qualifies for the ERTC can get a maximum credit of $7,000 per quarter per employee, totaling up to $21,000 for the entire year of 2021.
Common ERTC Credit Requirement Questions
When can I claim the ERTC Credit?
If you’re eligible to claim the Employee Retention Credit (ERTC) tax credit, there’s still time to do so. Businesses that meet the ERTC eligibility requirements can claim the credit up to three years after filing their tax return or up to two years after paying, whichever comes later. This can be done by filing Form 941-X, which is the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.
Form 941-X can also be used to report any errors or mistakes. Businesses can file claims for unclaimed credits for the year 2020 until April 15, 2024, and for the year 2021 until April 15, 2025.
How can I prevent making common Employee Retention Credit errors?
Many eligible employers missed out on claiming the Employee Retention Credit (ERTC) in the past, but there’s still an opportunity for them to take advantage of the credit. Employers can file amended employment tax returns to claim the ERTC, and the statute of limitations for filing amended quarterly returns is generally three years from the date of filing Form 941. According to the Form 941-X instructions, the period of limitations to amend the form begins on April 15th of the succeeding year in which the form was filed.
For example, to apply for the ERTC for the second quarter of 2021, assuming the original Form 941 was filed on time, the amended return needs to be submitted by April 15, 2025. However, to minimize risk during the claims process, employers need to understand who qualifies for the ERTC and other nuances of ERTC eligibility and claims. It’s essential to keep appropriate documentation as a key element for meeting all compliance requirements.
What are Employee Retention Credit qualified wages?
Qualified wages refer to the wages or compensation paid by an eligible employer to some or all of its employees after March 12, 2020, and before Oct. 1, 2021. This includes the eligible employer’s qualified health plan expenses allocated to these wages. However, the term “qualified wages” varies depending on the number of full-time employees employed by the business.
For businesses with more than 100 full-time employees, qualified wages refer to the wages paid to an employee for the time when the employee was not performing services due to a government order that either entirely or partially suspended the employer’s business activities or a significant drop in gross receipts. On the other hand, for businesses with 100 or fewer full-time employees, qualified wages are wages paid to any employee during a time when business operations were completely or partially halted due to a governmental order or when the company’s gross receipts significantly dropped.
It’s important to note that “qualified wages” include taxable wages, such as tips, as well as certain contributions to health benefit plans. Employers should consult with a tax professional or refer to official IRS guidance to ensure they meet all necessary criteria for claiming the Employee Retention Credit (ERTC).
Do you include tipped wages in qualified wages?
Tips are included in “qualified wages” only if they are subject to FICA taxes. In most cases, this means that tips must exceed $20 for a calendar month for an employee. However, if tips amount to more than $20 for a calendar month, then all tips, including the first $20, are considered “qualified wages”.
Employers must keep track of all tips received by their employees to accurately determine which tips qualify as “qualified wages” for the Employee Retention Credit (ERTC). This includes all tips that are subject to FICA taxes, including those that exceed the $20 threshold for a calendar month.
What is considered a large employer and small employer under the ERTC?
The qualifications for claiming the Employee Retention Credit (ERTC) vary slightly depending on the size of your business. To determine whether you’re considered a large or small employer, you need to look at the number of employees on your payroll.
For the 2020 ERTC, small employers are those businesses with 100 or fewer full-time employees. For the 2021 ERTC, small employers are those businesses with 500 or fewer full-time employees. On the other hand, for the 2020 ERTC, large employers are those businesses with more than 100 full-time employees, and for the 2021 ERTC, large employers are those businesses with more than 500 full-time employees.
It’s important to know who qualifies as a full-time employee when examining the size of your business for the ERTC. According to the IRS, a full-time employee is an employee who works 30 hours or more per week or 130 hours per month, pursuant to IRC 4980H.
As an employer, it’s essential to understand whether your business qualifies as a small or large employer for the ERTC. By knowing the size of your business and who qualifies as a full-time employee, you can determine the amount of qualified wages you can claim for the credit. It’s recommended to seek professional guidance or refer to official IRS guidance to ensure you meet all necessary criteria for claiming the ERTC.
Is ERTC eligibility only for full-time employees?
When calculating the Employee Retention Credit (ERTC), an employer can include wages given to both part-time and full-time workers. However, the credit can only be computed on the first $10,000 in salary and health plan expenses paid to each employee during each credit-generating period.
It’s important for employers to keep accurate records of employee wages and health plan expenses to determine the amount of qualified wages for the ERTC. Qualified wages are only eligible for the credit if they were paid during the designated credit-generating period and meet other eligibility criteria.
By accurately calculating the amount of qualified wages and health plan expenses, employers can ensure they claim the maximum amount of the ERTC for each eligible employee.
What types of businesses qualify for the Employee Retention Credit?
There is a broad range of businesses across various industries that can meet the Employee Retention Credit (ERTC) eligibility requirements. Some of the industries that can meet the qualifications for ERTC eligibility include construction, restaurants, hospitality, education, government, industrial, not-for-profit, real estate, and technology.
Can churches and religious organizations claim the ERTC?
Churches and religious organizations are eligible to claim the Employee Retention Credit (ERTC). For instance, if you operate a church or religious organization that was impacted by government-ordered capacity restrictions on gatherings or suffered a significant drop in gross receipts, you may meet the qualifications for claiming the ERTC.
It’s important to note that for churches and religious organizations, qualified wages do not include wages paid to any individual who is employed in a capacity substantially related to the exercise of religious worship. Additionally, the ERTC only applies to qualified wages paid to employees who are not performing services for the employer due to a suspension or significant decline in business activity.
To claim the ERTC, churches and religious organizations must meet all necessary eligibility criteria and keep accurate records of employee wages and health plan expenses. By seeking professional guidance and utilizing up-to-date technology solutions, churches and religious organizations can maximize the ERTC and its benefits.
Can you claim other tax credits along with the ERTC Credit?
In most cases, taking a “double-dip” approach is not allowed when it comes to tax credits. This means that you can’t claim a credit on qualified wages for the Employee Retention Credit (ERTC) and certain other tax credits, such as paid family medical leave or the Work Opportunity Tax Credit (WOTC).
For the ERTC, businesses can only claim the credit on wages that are not forgiven or expected to be forgiven by the Paycheck Protection Program (PPP). It’s important to keep in mind that businesses must remain fully compliant with all regulations and guidelines when claiming tax credits.
How long does it take to receive the ERTC Credit?
Once you have met the eligibility requirements for the Employee Retention Credit (ERTC) and filed Form 941-X with the IRS, you will be eligible for a refund. However, it’s important to note that the IRS does not provide a specific timeframe for how long it will take to receive the refund.
Based on estimates, businesses can expect to wait around nine months to receive a refund after claiming the ERTC. This timeline may vary depending on a variety of factors, such as the complexity of the claim and any potential processing delays.
While waiting for the refund, it’s important to keep accurate records of all documentation related to the ERTC claim. This includes records of employee wages and health plan expenses, as well as any other relevant documentation. By staying organized and prepared, businesses can ensure a smoother process and potentially expedite the refund timeline.