Recent changes due to the American Rescue Plan Act have significantly expanded employer eligibility to claim the Employee Retention Tax Credit (ERTC).
The ERTC was created to encourage employers to maintain current staffing throughout the pandemic by providing a payroll tax credit based upon wages you pay each employee. Originally the tax credit ended on 12/31/2020. Moreover, those that received PPP grants were not eligible. Recent changes now extend the credit through 12/31/2021 and allow employers who received PPP grants to also take advantage of the ERTC.
What is the Credit?
For 2020: A maximum credit of $5,000 per eligible employee. The credit is computed at a rate of 50% of qualified wages paid, up to $10,000 per eligible employee, for the quarter. The credit is available for all employees receiving wages if you are a small business with less than 100 employees.
For 2021: A maximum credit of $7,000 per eligible employee. The credit is computed at a rate of 70% of qualified wages paid, up to $10,000 per eligible employee, for the quarter. The credit is available for all employees receiving wages if you are a small business with less than 500 employees.
Who is an eligible employer?
To be eligible you must meet one of the following criteria:
1. Full or partial suspension of operations due to orders from a governmental authority “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate government authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19.” The credit applies only for the portion of the quarter the business is suspended, not the entire quarter. IRS examples of governmental orders include the following: orders from a government official that all non-essential businesses must close for a specified period; an emergency shelter in place designation for all not employed by essential business; and, a curfew on residents that impacts the operating hours of a trade or business for a specified period. As such, to be considered a partial suspension, it appears the government order must cause an employer’s business to not be able to perform some significant business function or cause the business to be unable to provide service to a significant number of customers that the business otherwise would be able to provide if restrictions were not in place. A limitation on the number of customers allowed in an business at a time that ultimately will not limit the employer’s ability to provide service to the same number of customers will not be considered a partial suspension of business operations.
2. A decline in gross revenue as measured against 2019. For 2020 that decline must be a 50% decline and for 2021 that decline must be a 20% decline. PPP loan forgiveness is included in gross receipts.
What are eligible wages?
Eligible wages are all wages and health insurance benefits paid to an employee during the time period in which the employer is considered and eligible employer. These must have been paid after March 12, 2020 and before Dec. 31, 2021. Moreover, the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP; i.e. you cannot use the same wages for the ERTC that were used for PPP.
For health insurance, wages include the employer and employee pretax portion and not any after-tax amounts.
How to claim the ERTC?
This credit can be claimed on an originally filed form 941, or on form 941X.
Can I claim both the PPP and ERTC?
The above is intended as a summary of the benefits that eligible employers can receive under the ERTC. However, most claims for ERTC are complicated and require a thorough review of all facts on a case by case basis.
Robert Hill and Jared Needham in our office are currently working with our clients to determine employer eligibility. If you have questions or concerns, please feel free to reach out to them at our office number or email them at firstname.lastname@example.org or email@example.com.