The Employee Retention Tax Credit (ERTC) is an important new tool for businesses struggling to retain employees who have been affected by the Coronavirus pandemic. The ERTC can potentially save employers up to $5,000 per employee. To be eligible for the ERTC, employers must meet certain criteria.
In this article, we’ll take a look at all of the eligibility requirements, as well as discuss the potential benefits and pitfalls of the ERTC:
Definition of Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is a federal tax credit available to employers who pay the salaries and wages of certain employees during the coronavirus pandemic. The purpose of the ERTC is to encourage employers to keep their workforce intact and reduce layoffs, helping to mitigated impacts of the COVID19 crisis. The ERTC was created as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed by Congress in 2020.
Under this tax credit, eligible employers are able to receive a maximum credit equal to 50% of up to $10,000 in wages paid per employee for an eligible quarter. Employers may be eligible for quarterly credits between March 13, 2020 through June 30, 2021 with an annual maximum per-employee limit of $7,000 in taxes paid wages.
For an employer to be considered eligible they must meet several criteria which include:
- They employee no more than 500 full-time employees at any given point within calendar year 2020; or
- Had multiple locations before being affected by COVID-19 but those locations were aggregated and counted as a single employer when determining eligibility under the SBA Paycheck Protection Program (PPP).
Further some employers are not allowed to claim the ERTC such as 501(c)(3) organizations that received emergency economic relief from other government funding programs and certain self-employed persons.
Overview of Eligibility Requirements
The Employee Retention Tax Credit (ERTC) is available to employers of all sizes if they experienced economic hardship due to the COVID-19 pandemic. To be eligible, businesses must have seen a full or partial suspension of operations due to a government order related to COVID-19 between March 13, 2020 and December 31, 2020 as well as gross receipts that are less than in the preceding calendar year. To determine eligibility and access the tax credit, employers must submit Form 941-X before filing their corporate tax returns.
In addition to the above general requirements, there are specific eligibility criteria that employers must adhere to in order to qualify for the ERTC. In particular:
- Eligible employers will demonstrate a decline in either not less than 50% of quarterly gross receipts compared with the same quarter in 2019 or specific government-mandated closures;
- Employers who subsequently experienced growth from quarter one through quarter four will also be eligible for ERTC benefits;
- Employers with more than 500 employees are not eligible unless it is a new business as of March 13, 2020; and
- Employers operating multiple trade(s) or business under common control will be subject to aggregate gross receipt testing across all entities held by a parent umbrella entity.
The ERTC provides businesses with some much needed tax relief during this time and there are rules related to how much money is available and how business owners can access it. It is important for business owners understand their individual qualification criteria prior too utilizing this opportunity.
The Employee Retention Tax Credit is available to eligible employers that are facing financial hardship due to the coronavirus pandemic. To be eligible, an employer must have experienced a full or partial suspension of operations due to governmental orders or had a significant decline in gross receipts. Employers can also qualify if they experienced both. Additionally, employers must have been in business on or before March 12, 2020, to qualify for the tax credit.
We’ll now look at the other eligibility requirements for the Employee Retention Tax Credit:
The Employee Retention Tax Credit (ERTC) is available to employers of all sizes, that have either fully or partially suspended operations due to governmental orders, or experienced significant financial hardship due to the COVID-19 pandemic.
To qualify for the ERTC, a business must meet all of the following criteria:
- Have not received a Small Business Interruption Loan (SBIL) under the Paycheck Protection Program
- Have been carrying out business activity prior to February 15th 2020 and still doing so after March 12th 2020
- Be subject to fully or partial suspension of operations due to governmental orders related to COVID-19; OR have incurred a “significant decline in gross receipts” which is defined as more than 50% in any quarter compared with the corresponding 2019 quarter.
The ERTC applies only to those businesses with 500 or fewer employees who are headquartered in the United States, including certain self-employed individuals. The exclusion doesn’t apply in certain cases such as public organizations including government entities and organizations such as educational institutions and churches. The credit is also not available for anyone who has lost their job due to termination/quit as opposed to lay off/furlough.
The taxpayer must have carried on a trade or business during 2020 and that business must have been fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19.
Qualifying Employees are those who are employed by the taxpayer and:
- Were in the employ of the eligible employer between March 12, 2020, and December 31, 2020;
- Have a biweekly wages of no more than $10,000 (the wages paid to such before March 12 are not counted); and
- Have employment rights that were suspended during any period for which a claim is made under this credit.
For the purposes of ERTC eligibility requirements, “employment rights” may include but are not limited to: having worked fewer hours than normal due to COVID-19 related limitations set out by applicable governmental authorities or receiving reduced pay.
To be eligible for the Employee Retention Tax Credit, employers must pay at least partially for each employee’s wages. This means employers must pay at least 50% of wages for employees to qualify for the credit. Employers can use this credit to offset their payroll taxes, or as a direct credit to lower their tax liability.
To understand if you qualify for the Employee Retention Tax Credit, let’s look at the qualifying wages:
Qualifying Wages for Full-Time Employees
The Employee Retention Tax Credit (ERTC) provides qualifying employers a refundable credit against certain employment taxes equal to 50% of the qualified wages they pay their employees from March 13, 2020 through December 31, 2020. Qualified wages are those wages paid to an employee for work performed during the period starting on March 13 and ending on December 31.
For full-time employees who were employed for at least 90 of the calendar days between March 13 and December 31, 2020, qualified wages are limited to $10,000 in total or $400 per day per employee. This means that if an employer pays a full-time employee $400 or more in a single day during this period they must count this as one day’s wages towards their $10,000 limit regardless of whether the employee actually worked that entire day or not.
For part-time employees who were employed for less than 90 days between March 13 and December 31 their qualified wages are limited to the average number of weekly hours multiplied by $10 dollars. Thus a part-time employee who works an average of 15 hours per week would have an individual Qualifying Wage Limit of 150 x 10 = 1500.
Qualifying Wages for Part-Time Employees
The Employee Retention Tax Credit (ERTC) is available to eligible employers that have experienced fully or partially suspended operations due to government orders related to COVID-19 or have experienced a significant decline in gross receipts during a calendar quarter. For employers who are eligible, the ERTC provides a credit equal to 50% of qualified wages up to $10,000 for each employee for 2020 and 2021.
In addition to full-time employees, businesses are also able to claim qualified wages paid to part-time employees in order to get the ERTC. The rules for determining wages of part-time workers are different than those applied when determining the credit for full-time employees. The wages paid must account for 120 hours per month over the period from March 13th, 2020 through December 31st, 2021. The IRS has specified that employers will “treat a month as having 120 hours with respect to an employee if it has more than 30 days and an employee’s average weekly hours total less than 120 over these months.” As a result, all compensable hours that an employee works per month should be included when adding up qualified wages and applying 4/9th method blended calculation formula under ERFT and EMST rules or 6/4ths method under Notice 2021-20 rules as applicable for part time employees who worked less than 120 hrs/month within Calender Quarter Covered Period from March 12th ,2020 – December 31st 2021.
Calculating the Credit
The Employee Retention Tax Credit (ERTC) is available to employers who were financially impacted by the COVID-19 pandemic and have experienced a significant decline in gross receipts. To calculate the credit, employers must take into account their average number of full-time employees during 2019 and 2020, as well as their gross receipts during 2020.
In this section, we will discuss how to calculate the credit and who is eligible for it:
Calculation of Credit Amount
The calculation of the credit amount is based on the average number of employees employed in 2020 by employers who were eligible to receive the credit at the time of claiming it. The amount of the credit is 50% of qualified wages up to a maximum of $5,000 per employee for all quarters in 2020.
Eligible employers can determine their “average number of full-time employees” in 2020 by calculating the average number of full-time employees they had during any consecutive 12 weeks in either:
- The period beginning on March 13, 2020 and ending December 31, 2020; or
- Any other 12 week period chosen by their employer, provided it begins after they become eligible for the Employee Retention Tax Credit and ends before January 1, 2021.
To calculate this average number, employers must add up the total full-time employees that have been employed during these 12 consecutive weeks (not including seasonal workers) then divide that number by twelve to get an average figure for that period. This figure should remain consistent throughout all four quarters until December 31st and should not be changed from one quarter to another if you are eligible for both periods stated above.
Claiming the Credit
The Employee Retention Tax Credit (ERTC) is a refundable tax credit for employers that are affected by COVID-19. This tax credit is available for wages that have been paid to eligible employees during the course of 2020. Eligible employers may claim the ERTC at their discretion, meaning they can choose to claim their wages in the current year or in future years.
In order to be eligible to claim the ERTC, an employer must have a significant decline in gross receipts of more than 50% compared with the same quarter in the previous year due to COVID-19. Employers that are not considered part of an Applicable Large Employer (ALE) and have less than 500 employees may qualify for ERTC even if they experience no decline in gross receipts as long as they meet certain criteria such as paid sick leave or vacation benefits.
To claim the credit, qualified employers must first calculate how much their total qualified wages were over a chosen period by taking into account both W-2 wages and those paid from other sources. Qualified wages are defined as the amount expended on compensation up to $10,000 per employee ($15,000 maximum if filing jointly) for 2020 and 2021 combined on an annual basis. Employers then calculate their total qualified health care costs, which can include amounts spent on health insurance premiums and other expenses incurred from providing group health care coverage such as group vision and group dental plans. Once all of these costs have been calculated, employers will be able to access a new quarterly form which will allow them to take advantage of the ERTC program when it becomes available later this year.
When considering if you are eligible for the Employee Retention Tax Credit, there are a few other factors to consider. For example, if you are a seasonal employer, the credit is not available. Additionally, if you are an employer with a gross receipts decline of more than 50%, the credit is only available for wages paid after the decline in gross receipts.
These are just a few of the considerations when determining eligibility for the Employee Retention Tax Credit:
- If you are a seasonal employer, the credit is not available.
- If you are an employer with a gross receipts decline of more than 50%, the credit is only available for wages paid after the decline in gross receipts.
Additional Requirements for Qualifying Businesses
Qualifying businesses must also meet other criteria to be eligible for the Employee Retention Tax Credit. These requirements relate to the operations of the workplace and wage levels, among other qualifications which can affect a business’ income and ability to keep employees working. In order to qualify for the relief offered by this credit, employers must also meet several additional requirements.
- The business must have suspended operations due to a governmental order that limits commerce, travel or group meetings (for commercial, social, religious or other purposes).
- The business must have experienced a significant decline in gross receipts year-over-year (generally at least 50%).
- Limited wages are eligible for the credit if they were paid before July 1, 2021; otherwise, wages will only be considered if they were paid after June 30.
- Generally speaking, employers that receive Paycheck Protection Program (PPP) funds will not be eligible for both programs—employer participation in one program disqualifies them from seeking benefits through both sources. Employers may receive only one benefit either through PPP loan proceeds or Employee Retention Tax Credit money; however businesses should speak with qualified tax professionals about their specific situation as some circumstances allow for more exceptions.
Other Tax Credits Available to Employers
In addition to the Employee Retention Tax Credit (ERTC), businesses can also take advantage of other payroll-related tax credits. These other credits are available to qualified employers and may be used in combination with the ERTC, depending on eligibility requirements. Other credits include:
- Small business health care tax credit: Eligible employers with fewer than 25 full-time employees and average annual wages of less than $50,000 may qualify for a tax credit of up to 50 percent of their premium costs for certain approved plans.
- Work Opportunity Tax Credit: Employers who hire individuals from eight specific “targeted” groups – including veterans, ex-felons, summer youth employees – may qualify for a tax credit. The amount is 40 percent of the first $6,000 in wages paid during the first year or 25 percent of the first $6,000 in wages paid if they already had the job at least three months before they were hired.
- General Business Credit: This is a more general tax credit which allows employers to deduct up to half their Social Security and Medicare payroll taxes that were paid during any fiscal quarter – although there are caps based on qualified investments.
- Alternative Minimum Tax Credits: Companies may be able to use this program when making large profit-generating investments; there are restrictions on what types of investments are eligible as well as maximum income limits that must be met. Find out more about AMT credits from your tax advisor or accountant.