If you have a small to midsized business that experienced financial hardship during the COVID-19 pandemic, you may still qualify for the Employee Retention Credit through 2025. Eligible businesses applying for the Employee Retention Tax Credit could earn up to $21,000 per employee. This significant amount is available to businesses through April 15, 2024 for the 2020 tax year and April 15, 2025 for the 2021 tax year.
Refundable Tax Credit Available to Small Businesses
The Employee Retention Tax Credit was established under the CARES Act to incentivize small businesses to keep employees on payroll and support them through financial hardship. During the pandemic, many small businesses experienced significant declines in gross receipts or were forced to suspend business operations due to government regulations. This cause many businesses to struggle financially both during and after the pandemic as they tried to continue paying business expenses during inflation while recouping sustained losses.
Eligibility for the Employee Retention Tax Credit
To be eligible for the Employee Retention Tax Credit, businesses must have paid qualified wages to employees during the 2020 or 2021 tax year. The rules for applying for the 2020 and 2021 tax years are different, so not all businesses are eligible to apply for both tax years.
2020 Tax Year
During the 2020 tax year, businesses are eligible if they had under 100 full-time employees and experienced one of the following:
- A significant decline in gross receipts (50%)
- Business operations were fully or partially suspended due to government regulations
To apply, businesses must have paid qualified wages to employees between March 12, 2020 and December 31, 2020. Businesses must report these qualified wages in order to apply. Only wages paid to W-2 employees are eligible for the Employee Retention Tax Credit.
2021 Tax Year
The rules for eligibility for the 2021 tax credit slightly differ from the rules for the 2020 tax year. As opposed to the entire tax year, businesses must apply for each calendar quarter that they are eligible for in 2021. Businesses can apply if they had up to 500 full-time employees for the 2021 tax year.
Only recovery startup businesses are eligible to apply for the ERC tax credit for the fourth quarter of 2021.
Apply Using Qualified Wages
Qualified wages are wages paid to W-2 employees during the 2020 or 2021 tax year. There is no maximum salary that an employee can earn to be eligible for the ERC tax credit. Tips paid to employees may also qualify for the Employee Retention Credit if the tips were reported to the IRS.
File Form 941-X
To apply for the Employee Retention Credit, employees must file Form 941-X to the IRS. This is the tax form filed to the IRS to amend Form 941. Businesses will need to amend their tax return for the 2020 or 2021 tax year in order to apply for the Employee Retention Credit. It is best to apply with the help of an ERC specialist who is experienced in handling applications to the IRS. An experienced ERC specialist can be a certified tax attorney or tax consultant. Avoid applying through an ERC mill that promises to submit your application for a high upfront cost. Reliable ERC specialists do not charge upfront fees for their services.
