Eligible employers are entitled to an Employee Retention Tax Credit (ERTC) of up to 70 percent of the first $10,000 in wages and certain health care plan expenses paid per employee for each of the first two quarters of 2021. This is in addition to an ERTC of up to 50 percent of the first $10,000 in wages and certain health care plan expenses paid per employee between March 13, 2020 and December 31, 2020.
What is the Employee Retention Tax Credit?
Designed to incentivize businesses to keep employees on the payroll during the pandemic, the ERTC is a fully-refundable tax credit that is part of the federal government’s COVID-19 relief plan. As part of this plan, the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which became effective January 1, 2021, amends and extends the former ERTC and the availability of advance payments of the tax credits under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Is My Company Eligible for the ERTC?
Previously, employers could only take advantage of the Paycheck Protection Program (PPP) OR the ERTC, so the ERTC was not widely used. However, Congress revised this provision to make both plans available to qualifying businesses.
There are two periods for which a business can claim the ERTC: (1) during the period the business has suffered a significant decline in revenue and (2) during the period the business’ operations are fully or partially suspended by a governmental order related to COVID-19.
Small businesses that suffered a revenue reduction in 2020 or 2021 can claim the ERTC. A revenue reduction specifically means a business experienced a decline in gross receipts by more than 20 percent in any quarter of 2021 compared to the same quarter in 2019 (or the previous quarter). A gross receipts decline of at least 50 percent is necessary to claim the credit for 2020.
Further, the tax credit applies to employers, including tax-exempt organizations, that conducted business during 2020 and were forced to fully or partially suspend operation during any quarter due to governmental orders related to COVID-19.
How is the Maximum Amount of ERTC Determined?
Eligible employers are entitled to a tax credit equal to 70 percent of the first $10,000 in wages and qualifying health plan expenses paid per employee for each of the first two quarters of 2021 (up to $14,000).
In addition, eligible employers are entitled to receive a tax credit equal to 50 percent of the first $10,000 in wages and qualifying health plan expenses paid per employee between March 13, 2020 and December 31, 2020.
Note that the combined maximum $14,000 credit for the first two quarters of 2021 is available even if the employer previously received the $5,000 maximum credit for wages paid in 2020.
What are Qualified Wages?
Qualified wages are wages, compensation, and qualified health plan expenses paid by an eligible employer after March 12, 2020 and before July 1, 2021 during periods where the business suffered a significant decline in revenue and during periods where the business’ operations were fully or partially suspended by a governmental order related to COVID-19.
Number of Employees Matters
For 2020, companies with 100 or fewer employees may claim the ERTC for all wages paid to employees while the employer is an eligible employer. For 2021, the threshold is increased to 500 employees.
Still, businesses who have more than these respective numbers of employees are eligible to claim the ERTC for all qualified wages, compensation, and health plan expenses paid to employees who are not providing services due to a suspension of operations due to governmental orders related to the coronavirus disease. No matter the size of your business, you can claim the ERTC if you continued to pay your employees while they could not work due to a
Other Notable Changes to the ERTC
- Previously, governmental entities were not eligible for the ERTC under the CARES Act; however, under the New Stimulus Act this tax credit is available to state or local run colleges, universities, and organizations providing medical or hospital care.
- While businesses with a PPP loan now qualify for the ERTC, the tax credit may not be claimed on wages used for PPP loan forgiveness.
How to Claim the ERTC
Amounts of ERTC are claimed on Form 941, Employer’s Quarterly Federal Tax Return. Although Forms 941 have already been filed for 2020, eligible businesses may file claims for refund to obtain amounts of ERTC to which they are entitled for 2020.
A determination of whether you meet each of the above requirements to receive the maximum federal tax credit allowable requires a detailed legal analysis. Contact me today so that I can assist you to: (1) determine the amount of tax credit that you are entitled and (2) file claims with the IRS to obtain those credits.