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The information below is current as of January 14, 2021. The below information is not, nor should it be misconstrued as, legal or financial advice. We highly recommend that interested parties use a reputable tax preparer – including certified public accountants or other knowledgeable tax professionals - when determining eligibility for the credit, calculating the credit, or submitting any payroll tax forms to claim the credit.

Now is the Time to Take Advantage of the Employee Retention Tax Credit (ERTC):

While many employers are familiar with or have taken advantage of the Paycheck Protection Program (PPP) to help offset employee costs during the pandemic, less are familiar with the Employee Retention Tax Credit (ERTC).

The ERTC, first created under the CARES ACT in March 2020, is a powerful tool to help businesses and nonprofits keep their employees on payroll by providing a refundable tax credit for qualified wages (including certain health plan expenses).

So, if this is such a great program, why have you never heard of it? Well, many employers chose not to use it in 2020 because, until now, businesses could only receive and use either the PPP or the ERTC but not both. However, in December, Congress made several favorable changes to the ERTC program including:

  • Extending the program through June 30, 2021 – allowing employers to claim the credit for wages paid in Q1 and Q2 2021
  • Expanding eligibility in 2021
    • Employers with 500 or fewer employees can now claim the tax credit for all eligible employees (up from 100 or fewer employees)
    • Only requiring a 20% reduction in quarter-over-quarter gross receipts for 2021 (down from 50% in 2020)
    • Allowing employers who have received, or will receive, a first-time or second-time PPP loan to also claim the ERTC, as long as they do not cover the same payroll costs.
  • Increasing the size of the tax credit paid in 2021 (up from 50% of qualified wages to 70%)
  • Allowing businesses to retroactively claim the tax credit for 2020

Highlights of Changes Made to ERTC:

 

Claiming in 2020 under Prior Law

Claiming in 2020 under Current Law

Claiming in 2021 under Current Law

Interacts with PPP

Not eligible to claim ERTC if employer received a PPP loan

Employers that have received, or will receive, a PPP loan can still claim the ERTC for 2020 and/or 2021 granted that the same wages are not covered by both programs

Size Requirements (to be eligible to claim credit for all employees regardless of their work status)

100 or fewer

 

500 or fewer

Necessary to Prove X% of Reduction in Quarterly Gross Receipts

50% reduction in gross receipts for 2020 quarter compared to same quarter in 2019

 

20% reduction in gross receipts for 2021 quarter compared to same quarter in 2019

 

Maximum Credit

Up to $5,000 per employee in 2020

Up to $5,000 per employee in 2020

Up to $14,000 per employee in 2020 (across Q1 and Q2)

These changes have made the ERTC program a valuable tool for local employers and one that they should certainly take advantage of in 2021.


Who is Eligible?

To claim the credit in 2021, an employer (including 501c tax-exempt organizations) with 500 or fewer employees (FTEs) must meet one of the following conditions:

  • Business operations were partially or fully suspended due to a COVID-19 related government order, or
  • Experience a 20% decline in gross receipts in Q1 2021 or Q2 2021 compared to the same quarter in 2019.

Note for claiming the credit in 2021: If the employer was not in existence on the first day of a calendar quarter in 2019, they can substitute the same quarter in 2020.

To claim the credit retroactively for 2020, an employer (including 501c tax-exempt organizations) with 100 or fewer employees (FTEs) must have met one of the following conditions:

  • Business operations were partially or fully suspended due to a COVID-19 related government order, or
  • Experienced a 50% decline in gross receipts in Q1, Q2, Q3, and/or Q4 2020 compared to the same quarter in 2019. Employers can claim the credit during the first quarter that they see this decline until the end of the quarter in which their receipts have returned to at least 80% of what they were for the same quarter in 2019.
    • Example: If receipts in Q1, Q2, Q3 and Q4 of 2020 were $35,000, $65,000, $95,000 and $125,000, and for the same quarters in 2019 receipts were $110,000, $120,000, $100,000 and $150,000, the “eligible quarters” for 2020 are Q1 (the first quarter in which receipts are less than 50% of 2019), Q2 (still less than 80% of 2019) and Q3 (the end of the first quarter in which receipts have returned to at least 80% of the same quarter of 2019).

Note for claiming the credit in 2020: If your business had more than 100 average monthly FTEs in 2019, only wages paid to employees who were NOT providing services in that quarter are eligible for the credit. Tele or remote work does count as work under this rule. If you have less than or equal to 100 average monthly FTEs in 2019, all wages paid to employees during the quarter in question are eligible for the credit, even if the employees were still working.

Employers that received, or will receive, a PPP loan can also be eligible for the ERTC for qualified wages paid in 2020 or 2021 granted they are not used to cover the same payroll costs.

Colleges and universities are now eligible to claim the credit in 2021.

Employers may not claim the same employee wages under the ERTC and the Work Opportunity Tax Credit for the same period.

Self-employed individuals can not use the ERTC for their own draws (paying themselves).


Size of the Tax Credit:

The ERTC is worth different amounts for 2020 and 2021.

For wages paid after March 12, 2020, and before January 1, 2021, the ERTC is worth 50% of qualified wages per employee up to $10,000 for the year (up to $5,000 per employee for all of 2020).

For wages paid after January 1, 2021 and before July 1, 2021, the ERTC is worth 70% of qualified wages per employee up to $10,000 per quarter (up to $7,000 per employee per quarter for a maximum of $14,000 per employee for Quarters 1 and 2 of 2021).

So this means that the maximum credit per employee is $5,000 for 2020 and $14,000 for 2021 ($7,000 in Q1 2021 + $7,000 in Q2 2021). Therefore, the maximum ERTC that an eligible employer can claim per employee for 2020 and 2021 is $19,000.


How to Claim the Credit:

The ERTC allows employers to retain certain employment taxes (federal income taxes, employee FICA taxes, and the employer’s share of FICA taxes) that otherwise would be deposited.

To claim the credit, follow these steps:

  1. Calculate the amount of your credit for the quarter for which you are filing your Form 941, Employer’s Quarterly Federal Tax Return.
     
  2. Reduce the amount that you deposit by the amount calculated in Step 1 and account for this credit on Form 941.
    1. For example, if your credit for Q 2021 is $14,000 and the amount you are required to deposit is $19,000, reduce the deposit by $14,000 and deposit $5,000.
       
  3. If you determine in step 1 that the credit will exceed the amount you are required to deposit, you can receive an advance payment from the IRS by submitting Form 7200 Advance Payment of Employers Credits Due to COVID-19.
    1. For example, if you calculate your credit for Q1 2021 to be $28,000 but the amount you were scheduled to deposit was $25,000, your credit will wipe out the required deposit and leave you with an addition $3,000 credit which you will receive as a reimbursement from the IRS. You can claim this reimbursement in advance by submitting the Form 7200.

While the IRS has not yet released specific guidance for claiming the credit in 2021 or retroactively in 2020, employers can still begin determining their eligibility for the credit using the information above.

Keep an eye on the IRS website for more information.


This guide on the ERTC is courtesy of our friends at The Hoffman Eells Group.