The Employee Retention Tax Credit: What is it? And does your business qualify?
As part of the 2020 CARES Act, the IRS launched the Employee Retention Tax Credit (ERTC), a safety net designed to support businesses that have kept their employees on the payroll through the economic hardships of COVID-19.
Since then, the ERTC has been modified and renewed – under both the Taxpayer Certainty and Disaster Relief Act of December 2020 and the American Rescue Plan Act of March 2021 – and it remains a helpful safety net for businesses small and large.
The ERTC is set to expire at the end of 2021. But, given that the statute of limitations for obtaining these credits is three years, you have time to claim credits for both 2020 and 2021.
So, does your business qualify for the credit? How much money should you expect? And how can you apply?
Let’s break it down.
How much is the employee retention tax credit worth?
The Employee Retention Tax Credit scales depending on the size of your business and the number of employees for whom you’re claiming the credit, among other factors. We’ll cover those in a minute, but let’s start by breaking down how much the credit is worth for qualified wages in 2020 vs. 2021.
For 2020, a business can claim 50% of up to $10K in qualified wages per employee, in the aggregate for all qualifying quarters. The IRS caps the 2020 credit at $5K per employee for the year.
2020 Example: If a business has 20 employees that receive at least $10,000 in wages (excluding wages used for PPP forgiveness) in 2020, they would be entitled to a credit of $100K.
The rules changed for 2021, allowing businesses to unlock more incentives. For 2021, a business can claim 70% of up to $10K in qualified wages per employee in each qualifying quarter. The IRS caps the 2021 credit at $28K per employee per year.
Therefore, a business that claimed $100K in credits for 2020 could claim up to $560K for 2021.
20 Employees x $7K = $140K Credit/Quarter (for a total of $560K for the year)
Do you qualify for the ERTC?
For 2020 and 2021, employers can qualify for the ERTC through one of two ways:
- If you fully or partially suspended your business operations due to government shutdown orders, you may qualify. Voluntary suspension of your business operations doesn’t apply; you can only claim wages paid during the shutdown period; and the shutdown orders have to come from a federal, state or local government with jurisdiction over your business operations. If a local health department mandated workplace closures for cleaning and disinfection, it qualifies. If your city’s mayor ordered that all non-essential businesses must close, you can claim the wages paid to your employees during the closure.
- You can also qualify if your gross receipts declined significantly.
To claim the credit for 2020, your business must have suffered a 50% or more decline in gross receipts in a calendar quarter compared to the same quarter in 2019. Wages are eligible beginning with the first calendar quarter in which gross receipts were less than 50% compared to the corresponding 2019 quarter. That eligibility ends either January 1st, 2021, or the first calendar quarter after the first calendar quarter in which gross receipts are greater than 80% compared to the same calendar quarter of 2019—whichever comes first.
The 2021 rules are a bit looser. For the 2021 credit, your business must have suffered a 20% or more decline in gross receipts in a calendar quarter compared to the same quarter in 2019. A business can also elect to compare gross receipts for the immediately preceding quarter.
Are you a large or small employer?
How much ERTC funding you receive depends on whether the government considers your business small or large. Interestingly, due to rule changes, many businesses that qualify as ‘large’ for 2020 qualify as ‘small’ for 2021.
For 2020 credit, a business qualifies as a ‘large employer’ if it averaged more than 100 full-time employees in 2019.
For 2021, a business qualifies as ‘large’ if it averaged more than 500 employees in 2019.
Therefore, if a business has 150 employees, it is considered ‘large’ for its 2020 credits and ‘small’ for its 2021 credits.
Note: The IRS defines a full-time employee as any employee who averaged 30 hours per week or 130 hours per month during the given period. The count is based on the number of actual full-time employees. It is not measured based on the aggregate full-time equivalent employees.
What wages qualify for the credit?
As we mentioned, your qualifying wages depend on whether you are considered a small or large employer (see above for definitions). For small employers, all wages and qualified health plan expenses paid for all employees – whether or not they performed services for the company – for the quarter are eligible, up to $10K per employee. Meanwhile, for large employers, the only wages and health plan expenses that qualify are those paid to employees who did not perform services for the employer during that period. Small employers can also apply Sick and Vacation Pay, but large employers cannot. Termination Pay cannot be applied for any employer.
Eligible health plan expenses include both employer payments and employee contributions made on a pre-tax basis, for amounts paid to maintain a group health plan. But you can’t double-dip: A business cannot use the same wages that were used for purposes obtaining forgiveness of a PPP loan (or any other federal tax credits).
How can you claim the credit?
To apply for the ERTC, start by filing Federal Form 941. Remember: the statute of limitations is three years for this credit, so there’s still time to apply for both the 2020 and 2021 versions of the credit.
IMPORTANT UPDATE: On November 15, 2021, President Biden signed into law the infrastructure bill, which terminated the employee retention credit early, making wages paid after Sept. 30, 2021, ineligible for the credit (except for wages paid by an eligible recovery startup business).
Need some guidance? Have a question? The Dugan & Lopatka team has helped numerous businesses identify and pursue tax credits like the Employee Retention Tax Credit, the R&D Credit and many others. By providing a holistic range of financial services, including tax management and planning, we can help your business stay in compliance, prepare for the future, and take advantage of all the incentives for which you may qualify. Contact our team to get started.