Contents
Introduction
The Employee Retention Tax Credit, or ERTC, was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This tax credit is available for eligible employers who have been significantly adversely affected by the economic downturn caused by the COVID-19 pandemic. The maximum credit allowed is up to 50 percent of wages paid from March 12 through December 31, 2020 up to $10k per employee per quarter.
This article will cover all aspects of the employee retention tax credit so you can determine if it is a good option for your business.
Overview of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) allows businesses to receive a tax credit for retaining their employees during the COVID-19 pandemic. The tax credit is available to employers affected by a suspension of operations due to COVID-19 or certain economic declines due to the pandemic.
In this section, we will provide an overview of the tax credit in order to understand
- how the credit works
- who is eligible for it
Eligibility Requirements
In order to take advantage of the Employee Retention Tax Credit, employers must meet certain criteria. Generally, employers must show that they have experienced either a full or partial business shutdown due to COVID-19 related restrictions or a significant decline in gross receipts when comparing a quarter of 2020 to a quarter in 2019.
The criteria for a full or partial business closure includes an order from an appropriate governmental authority limiting operations, due to the COVID-19 pandemic, so that normal activities are suspended at some or all of a business’s locations.
Furthermore, employers can show that there has been at least a 20% decline in gross receipts for any one quarter of 2020 when compared with the same quarter in 2019 to reflect significant economic hardship due to the pandemic. Any employer who faced restrictions from January 1 through June 30 is eligible for calculating this requirement regardless of whether it faced additional restrictions after June 30 and into 2021.
Additionally, eligible businesses may also receive credit for wages paid prior to enactment date—as long as such wages are reported on IRS Form 941 no later than April 2021—if they meet certain requirements. Self-employed individuals also qualify and may claim refunds by filing Forms 1040-X, Amended U.S. Individual Income Tax Return and Schedule 5 (Form 1040), Other Payments and Refundable Credits if they meet specific criteria further discussed in IRS Notice 2021-20.
Maximum Credit Amount
The Employee Retention Tax Credit (ERTC) is part of the CARES Act and was put in place to help businesses cope with the economic fallout related to the COVID-19 pandemic. It is available for eligible employers that retain employees or maintain employee wages through December 31, 2020. It provides businesses with a refundable employee retention tax credit of up to 70% of up to $10,000 in qualified wages paid per employee throughout the year.
The maximum credit amount that a business can receive is dependent on several criteria including:
- the number of employees
- total wages paid out per quarter
- taxable income
To qualify for the maximum credit amount, businesses must have fewer than 100 full-time employees during the year and pay each qualifying employee more than $6,000 for calendar quarters ending after June 30th and before December 31st. The maximum credit per quarter for large employers with more than 100 full-time employees (or small employers with fewer than 100 full-time employees that fail to pay qualifying wages) is set at $15,000 per quarter per employer.
Additionally, if an eligible employer’s taxable income is less than $150,000 in 2020 there are no taxable income restrictions imposed on them meaning they will be able to fully avail themselves of this credit regardless of their level of taxable income so long as they have no employment taxes due or have made sufficient deposits to cover these taxes.
How to Claim the Credit
The Employee Retention Tax Credit (ERTC) is an incentive created by the CARES Act on March 27, 2020. The goal of this credit is to help businesses keep employees on their payrolls even if they are forced to close due to COVID-19 related restrictions or suffer significant economic losses.
To claim the ERTC, employers must fill out Form 941-X and submit it along with additional required documentation and payments to the Internal Revenue Service (IRS). Eligible employers can then receive refundable chips on qualified wages up to $5000 per employee, up to $10,000 total in a taxable year.
There are two types of eligible employers who can qualify for the tax credit:
- Groups that were forced to close all or part of their business due to COVID-19 related restrictions.
- Groups that saw at least a 50% decline in gross receipts for any calendar quarter compared to the same period in 2019.
In order for an employer’s wages or salary payments paid after March 12, 2020 and before January 1, 2021 to be qualified for purposes of claiming the ERTC – regardless of whether it was paid during a closure period – employees performing services must be either full-time or part-time employees at all times during that period. Additionally, only wages and salary paid up until December 31st will count for purposes of determining whether an employer has seen a significant decline in gross receipts.
Employers must also meet various other requirements outlined by the IRS in order to comply with IRS rules and regulations when claiming the ERTC, including recordkeeping and reporting rules applicable only applicable when claiming this credit. Employers should consult with their tax advisors and refer directly IRS Publication 5251 regarding exceptions which may apply as well as any different state tax laws information that may also apply.
Extension of the Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) was initially available in 2020 to help businesses affected by the pandemic. It was recently extended to the end of 2021, offering more businesses the opportunity to take advantage of this tax credit.
In this article, we’ll cover all you need to know about the extension of the ERTC and how it can benefit your business:
Extension for 2021
On December 27, 2020, Congress extended the Employee Retention Tax Credit (ERTC) for 2021. The extension includes two key changes that greatly increase the value of the credit for eligible employers:
- Eligible employers can now access the ERTC for up to six consecutive quarters starting in 2021. This means that an employer may use this credit consecutively from January 1, 2021 through June 30, 2022 if their business has been affected by COVID-19.
- There is also an increase in the amount of credit available for each qualified employee for 2021. The maximum amount was increased to $7,000 per employee (or $14,000 if incurred health plan expenses are included).
These updates provide more financial assistance to employers and employees who have been severely impacted due to decreased revenue as a result of COVID-19 and related governmentally mandated safety regulations and orders.
If your business meets certain criteria, including having operations partially or fully suspended due to governmental restrictions or experiencing a significant decline in gross receipts on a year-over-year basis compared to 2019, you may be eligible for this valuable tax credit starting in 2021. It is important to consult with a professional tax advisor or CPA before claiming any credits on your taxes due to potential eligibility requirements and qualifying thresholds that must be met in order for businesses to receive the credit properly.
Extension for 2022
Provisions for the Employee Retention Tax Credit (ERTC) have been extended until the end of 2022 due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This tax break is designed to assist employers in cases where business activities have been hindered due to circumstances beyond their control.
The Employee Retention Tax Credit provides a fully refundable credit against social security taxes equal to 70% of up to $10,000 in qualified wages paid per employee in 2020 including healthcare benefits. The credit amount is improved for 2021 and 2022, providing a fully refundable credit of up to 80% of up to $10,000 in qualified wages per employee including healthcare benefits.
Employers are eligible for the ERTC provided their gross receipts for any calendar quarter during 2020 or 2021 are less than 50 percent as compared with the corresponding calendar quarter during 2019. After gross receipts reach at least 80 percent of 2019 levels, employers may still qualify if certain safe harbor conditions are met – such as exhibiting reduced operational hours or laying off employees after February 15th and before March 31st of 2021.
To be eligible for full benefits under the extension until 2022, employers must continue to meet eligibility requirements similar to those required prior to the extension and comply with other rules imposed by The Emergency Economic Stabilization Act (EESA) of 2008 as amended by subsequent legislation like The American Rescue Plan Act of 2021 (ARPA). Employers should also take into account any state or local laws that may apply while they are trying to determine their eligibility.
Conclusion
The Employee Retention Tax Credit (ERTC) is a tax credit available to businesses impacted by the COVID-19 pandemic. This refundable credit is equal to 50% of qualified wages an eligible employer pays their employees after March 12, 2020 and before December 31, 2020. Eligible employers may use the ERTC to offset up to $10,000 in wages per employee for the calendar year. It can also be applied against payroll taxes and other credits like the Paid Leave Credits.
The Emergency Economic Stabilization Act of 2020 extended this credit through December 31, 2021, at an increased rate of 70% and with an expanded definition of eligible employers. These changes are still subject to congressional approval but are expected to provide a significant amount of financial support for employers affected by the COVID-19 pandemic.
For more information about requirements for eligibility and claiming the ERTC, please consult your tax advisor or review IRS Notices 2020-22 and IR-2020-84.