The Employee Retention Tax Credit (ERTC) was created to incentivize employers to retain their employees through the COVID-19 pandemic in 2020. The ERTC was later modified to pay out up to $7,000 per quarter per employee through 2021. Some of our clients continue to be surprised by their qualification and size of the benefit, so here is a summary of what you need to know about the credit.
Qualifying for the credit
The ERTC was expanded in December 2020 with the passage of the Consolidated Appropriations Act (CAA), allowing more businesses to take advantage of the credit and get a boost in its benefit. The ERTC applies to employers whose:
- Operations were at least partially suspended due to a COVID-19 related government shutdown order, or
- 2021 gross receipts dropped more than 20% compared to the same quarter in 2019 (until gross receipts exceed 80% of gross receipts in the earlier quarter), and
- Number of employees does not exceed 500.
Additionally, the American Rescue Plan Act, signed into law in March 2021, expanded ERTC eligibility to employers who began operating after February 15, 2020, and have average annual gross receipts of $1 million or less. Labeled as Recovery Startup Businesses, these employers have specific conditions for determining when operations started and how to determine whether they qualify each quarter. They are also subject to a different per-employee credit limitation.
Determining your credit & how it works
Originally, the CARES Act limited the ERTC to 50% of qualified wages (including health benefits) up to $10,000 per eligible employee from March 12, 2020, through December 31, 2020. This resulted in a maximum benefit of $5,000 per employee in 2020. Additionally, most organizations taking Paycheck Protection Program (PPP) benefits could not also participate in the ERTC.
The expanded provisions by the CAA extended the credit to June 30, 2021, and allowed employers to receive the ERTC for any wages that were not paid with forgiven PPP loans. Additionally, the CAA raised the credit to 70% of qualified wages (up from 50%) starting on January 1, 2021, and boosted the per-employee qualified wages limit from $10,000 per year to $10,000 per quarter. This results in employers receiving a credit up to $7,000 per quarter per employee for 2021.
With ARPA’s passage, the credit is currently allowed for wages through December 31, 2021. ARPA also provided extra relief to “severely financially distressed employers,” those with less than 10% of gross receipts for 2021 when compared to the same calendar quarter in 2019. Beginning in the third quarter of 2021, regardless of employer size, these organizations can count any wages paid to an employee during any calendar quarter as qualified wages.
Finally, with the passage of ARPA and IRS guidance, employers can apply the credit against their share of Medicare taxes with the excess refundable. Originally, employers could only apply the credit against social security taxes.
Some caveats
ARPA prohibits the “double-dipping” of certain types of wages. Those wages paid with PPP loans or considered for other business tax credits like COVID-related paid sick and family leave, Work Opportunity Tax Credits, or Research and Development Tax Credits can’t also be factored into the ERTC calculation. Additionally, Shuttered Venue Operator Grant or Restaurant Revitalization Fund recipients may not report payroll costs associated with those programs as qualified wages for ERTC purposes.
Most importantly, current legislation may retroactively stop the ERTC on September 30, 2021. As part of the current infrastructure bill passed in the U.S. Senate and pending a vote in the House of Representatives, there is a provision that eliminates the ERTC credit for the fourth quarter of 2021. With the final language of the bill still uncertain, it would be prudent for employers to not count on the ERTC in the fourth quarter of 2021 until passage. If the ERTC ends up unscathed and intact for the rest of 2021, employers can file a Form 7200 to request an advance of their ERTC benefit.