What You Need to Know
- The rules for claiming the employee retention tax credit were expanded in 2021, so some small businesses may still file amended payroll tax returns to do so.
- Small-business owners have up to three years from their original filing deadline to retroactively claim the credit.
- The IRS has also provided retroactive penalty relief for taxpayers who owe added income tax.
Many small-business clients have already taken advantage of the CARES Act relief provisions for 2020 and 2021. Others, however, may still be eligible for assistance if they failed to take full advantage of the relief provisions in past years.
Generally, businesses were eligible for the refundable employee retention tax credit (ERTC) if their business operations were suspended in 2020 or 2021, if they sustained a certain level of revenue loss or if they qualified as a recovery startup business after Feb. 15, 2020.
The rules for claiming the ERTC were expanded significantly in 2021, meaning that some small-business clients may not have taken advantage of the relief. It’s still possible for those clients to file amended payroll tax returns — so it’s critical to fully understand the rules to make sure clients are getting the full amount they deserve.
Expanded 2021 ERTC
The employee retention tax credit is no longer available for wages paid after the third quarter of 2021. Still, some small-business owners may not have realized that they qualify for the 2021 credit, and they have up to three years from their original filing deadline to retroactively claim the credit.
Typically, employers were eligible to claim the ERTC if their business operations were suspended in 2020 or 2021. They were also eligible in 2020 if they experienced a 50% revenue decline compared with the same quarter in 2020. For 2021, however, businesses may qualify if their revenue declined by only 20% when compared with the same quarter in 2019.
Under the original law, employers were not eligible for the ERTC if they also received a Paycheck Protection Program (PPP) loan. That rule was later eliminated, so that businesses that received PPP loans could also take advantage of the ERTC (however, if PPP loan proceeds used to pay wages were forgiven, those wages were not eligible for the ERTC).
The amount of the credit was also significantly increased in 2021. Originally, the credit was capped at 50% for up to $10,000 in wages (so, $5,000 per employee). In 2021, the amount was expanded so that employers could claim up to $7,000 per employee per quarter (up to $21,000 total in 2021).
Many employers have also been confused about the rules for working employees. Originally, employers with 100 or more employees were prohibited from claiming the credit with respect to wages paid to working employees (in other words, only wages paid to employees who were not working or who were working on a reduced schedule counted).