Complete Guide: Employee Retention Tax Credit
A number of clients and businesses have reached out to us with questions about the ERTC, so we compiled this guide to answer the most frequently asked questions.
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a program passed by Congress as part of the CARES act to provide struggling companies with financial assistance. The program allowed eligible employers to receive payroll tax credits up to 50% of qualifying wages, including eligible health insurance expenses, paid to employees as an incentive to keep employees on payroll during the pandemic. The credit is applied against the employer’s share of Social Security taxes and is refundable. Congress later extended the ERTC program through 2021 and revised the employer eligibility requirements and increased the amount of the credit for 2021.
If you are an employer and wondering whether you missed your opportunity to claim a tax credit, the good news is that there is still time to claim the credit. Eligible employers are allowed up to three years to claim the tax credit. To help employers better determine whether they may be eligible for the ERTC, the following is a summary of the program’s eligibility requirements and the amount of potential tax credits available.
Who Qualifies for the Employee Retention Tax Credit?
Generally, only employers who suffered a financial hardship during the first two years of the pandemic are eligible for the ERTC. Eligibility is determined on a quarterly basis. If an employer is eligible for a particular calendar quarter or multiple quarters, the employer may receive a tax credit based on the qualified wages for that quarter or quarters.
To qualify for the ERTC, employers must meet one of the following requirements:
The employer’s business was fully or partially suspended during a calendar quarter by a government order due to COVID-19, or
The employer had a significant decline in gross receipts
The credit applies to qualified wages paid during the calendar quarter or quarters during which either of those criteria is met.[1]
When determining whether an employer had a significant decline in gross receipts for 2020, the period of significant decline begins during the first quarter that the employer’s gross receipts are less than 50% of the gross receipts for the same calendar quarter in 2019. The period of significant decline continues until the quarter where the employer’s gross receipts are more than 80% of the gross receipts for the same calendar quarter in 2019. An employer is eligible for any quarter in 2021 where the gross receipts are less than 80% of the gross receipts for the same quarter in 2019 (or in 2020 if the employer was not in business during 2019).
Businesses that started after February 15, 2020 (referred to as “Recovery Startup Businesses”), may be eligible for ERTC, but only for the third and fourth quarters of 2021. Annual gross receipts must be $1 million or less, and the business must not otherwise be eligible for the ERTC. The business must also not share common ownership with a company that was in business prior to February 15, 2020.
Also, please note that employers who received a Paycheck Protection Program (PPP) loan were previously ineligible for the ERTC. This is no longer the case; these employers are now eligible for the credit. However, other loans may disqualify the employer from receiving the credit and other exclusions may apply.
What Wages Qualify for the ERTC?
Qualified wages are those wages and health care costs paid to any employee during the period in which operations were suspended or there was a significant decline in gross receipts. For large employers, only wages paid to employees who were not providing services for the employer are eligible for the credit; wages paid to employees who were performing services for the employer were not eligible. For 2020, a large employer was an employer with more than 100 employees in 2019. For 2021, a large employer was an employer with more than 500 employees in 2019. For employers with fewer employees than those thresholds, the employer could receive the credit regardless of whether or not the employees were working.
For the third and fourth quarters of 2021, Congress added a category of employers called a “Severely Financially Distressed Employer.” This employer is one where an employer’s gross receipts for the quarter were less than 10% of gross receipts for the same quarter in 2019. These employers may receive a credit regardless of the number of employees, even if the employees were performing services. The election to use a prior quarter’s gross receipts applies to this situation.
What Tax Credit Amount Can Employers Expect?
For qualified wages paid between March 13, 2020, and December 31, 2020, the employer is entitled to a credit of 50% of the qualified wages, up to a maximum of $5,000 credit. For qualified wages paid between January 1, 2021, and December 31, 2021, the employer is entitled to a credit of 70% of the qualified wages up to a maximum of $7,000 per quarter. Recovery Startup Businesses may receive a separate $50,000 maximum aggregate credit for the third and fourth quarters of 2021.
[1] Subsequent changes to the ERTC allowed employers to use a prior quarter’s gross receipts for any quarter of 2021.
If you have additional questions regarding the ERTC and how it may apply to your business, we would love to serve you. Book a consultation with us today!
The information provided here does not constitute legal advice. Hutchinson Cox makes neither express nor implied warranties regarding the use of this material. The reader should always seek competent legal advice as the facts of every case vary.