The Employee Retention Tax Credit (ERTC) was originally established by the CARES Act to help small businesses affected by COVID-19. The ERTC is a refundable tax credit applying to the 6.2% employer portion of employee Social Security payroll tax, computed on a calendar-quarter basis. To provide further economic relief to employers affected by government-mandated shutdowns and economic uncertainty, the Consolidated Appropriations Act, 2021 (CAA) extended the ERTC and broadened eligibility standards. The ERTC is an opportunity employers can’t afford to overlook, and understanding eligibility and terms can help maximize the benefits their companies see in return.
Which employers are eligible for the ERTC?
Employers are eligible to apply for the credit for any period of time their company was fully or partially suspended due to a COVID-19-related government order. A partial suspension may even include social distancing-related modifications. We expect further guidance to be issued on meeting the partial or full suspension requirements, so stay tuned. Alternatively, an employer may determine eligibility based on their gross receipts. The CAA upholds the IRS tax code section 6033 definition of gross receipts, which includes all items of income without reduction for costs or expenses. For tax-exempt organizations, gross receipts are defined in the same manner and include amounts received for services, income from investments, and total sales, net of returns and allowances. The gross receipt criteria are different for credits for qualifying wages paid in 2020 and 2021.
2020 ERTC – Employers have a retroactive opportunity for the ERTC, which is available for qualified wages paid from March 12, 2020, through December 31, 2020. An employer qualifies as a small business for this purpose if the business employed an average of 100 or fewer full-time employees in 2019. The refundable credit rate is 50% on up to $10,000 of qualified wages, per employee, per year. If determining eligibility based on gross receipts, in a calendar quarter, gross receipts must have declined by at least 50% compared to the same quarter in 2019. An employer’s eligibility will end in the calendar quarter that follows a quarter in which the employer experiences gross receipts of more than 80% compared to the same quarter in 2019.
2021 ERTC – For 2021, the ERTC is available for qualified wages paid from January 1, 2021, through June 30, 2021. An employer would qualify as a small business for this purpose if the business employed an average of 500 or fewer full-time employees in 2019. The refundable credit rate is 70% on up to $10,000 of qualified wages, per employee, per quarter. Again here, if determining eligibility based on gross receipts, in a calendar quarter, gross receipts must have declined by at least 20% in comparison with the same quarter in 2019, or they must have declined by at least 20% in the immediately preceding calendar quarter in comparison to the same quarter in 2019.
Since the signing of the CAA, new employers not in existence for all or part of 2019 are now eligible, as are certain governmental bodies. Employers that took or will take advantage of the PPP are also eligible for the ERTC. The CAA still prevents a double benefit because wages cannot be claimed against the ERTC and as a forgivable PPP cost. It appears qualified wage and health expense amounts are applied to the ERTC first; however, we expect further guidance to be issued on the mechanics of applying PPP payroll amounts. Federal and state governments, including political and agency subdivisions, are not eligible unless they are qualifying 501(c)(1) organizations, such as those working primarily in medical or hospital care and colleges or universities.
Qualifying Employees & Wages – While the overall number of employees you employ does not affect your eligibility to claim the ERTC, the average number of full-time employees (FTEs) you employed during 2019 does affect your determination of qualified wages. For ERTC purposes, an FTE is an employee who, in any calendar month in 2019, averaged at least 30 hours per week or 130 hours per month. Certain entity groups, entities under common control, and affiliated groups must be aggregated, or considered a single employer.
Qualifying wages are wages paid to employees by qualifying employers. Regardless of the number of employees you employed in 2019, you may claim a credit for employee wages paid while they are or were not providing services. Allocable healthcare expenses are also considered qualified wages, to the extent they are excluded from your employees’ gross income. Employers may include healthcare costs paid on behalf of furloughed employees.
Hear About It from the Experts!
On February 5, 2021, we co-sponsored a panel discussion with HUB International’s Tim Quin, David Natan of Newburg CPA, and Jeff Plakans of Commonwealth Payroll & HR. Moderated by HUB’s Marc Mingolelli, the panelists provided an in-depth look at the ERTC. Our experts walked through examples and high-level calculations; talked about the credit’s impact on your business taxes and explained why the ERTC is an opportunity you can’t afford to overlook. Watch the recording to learn about eligibility and how you can maximize your return.
Contact Commonwealth Payroll & HR
The professionals at Commonwealth are committed to keeping our clients up-to-date and compliant. As you navigate new and evolving relief programs and legislation, let our professionals answer your questions; provide you with best practices; help with management and HR personnel training; assist with policy, handbook, and other documented updates; and implement the appropriate procedures and software. Contact us today to learn how we can help with your ERTC, PPP loan forgiveness, payroll, and HR needs.
*The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites provided only for the convenience of the reader.