By Judy Mason, CPA, CVA – Partner and Joshua Prince, CPA, MST – Manager
The Employee Retention Tax Credit (ERTC) encourages companies to maintain their workforce by providing eligible businesses with a fully refundable tax credit on qualified employee wages.
The CARES Act, which passed in March of 2020, created the ERTC. The American Rescue Plan Act of 2021 (ARPA), signed into law on March 11, 2021, provides businesses with additional relief by extending the ERTC through December 31, 2021. The qualifications for the 2021 credit are different from those for the 2020 credit. Originally, the CARES act did not allow employers to claim the 2020 ERTC if they received a PPP loan. This restriction was lifted, allowing businesses who received a PPP loan in 2020 to now apply for the ERTC.
Determining ERTC Eligibility
Businesses and tax-exempt organizations are eligible for the ERTC if they meet one of two qualifications:
1. Operations fully or partially suspended due to government restrictions related to COVID-19
2. Experienced significant decline in gross receipts during a calendar quarter compared to the same quarter in 2019
2020 credit criteria and application: March 13, 2020 to December 31, 2020:
- More than 50% decline in gross receipts during any calendar quarter in 2020 compared to the same quarter in 2019
- Eligible employers must have 100 or fewer full-time employees based on the 2019 average monthly count. For employers with more than 100 full-time employees, the credit is limited to wages paid to employees who did not work.
- Wages exclude compensation paid to employees who are also relatives of S Corporation shareholders who own 50% or more of the business.
- $10,000 per year maximum creditable wages per employee, including health insurance expenses paid and expenses for furloughed employees
- Credit is 50% of qualified wages up to a maximum credit of $5,000 per employee
2021 credit criteria and application: January 1, 2021 to December 31, 2021:
- More than 20% decline in gross receipts during any calendar quarter in 2021 compared to the same quarter in 2019. Alternatively, the employer can elect to use the prior calendar quarter compared to that same 2019 quarter.
- Eligible employers must have 500 or fewer full-time employees based on the 2019 average monthly count. For employers with more than 500 full-time employees, the credit is limited to wages paid to employees who did not work.
- Wages exclude compensation paid to employees who are also relatives of S Corporation shareholders who own 50% or more of the business.
- $10,000 per quarter maximum creditable wages per employee, including health insurance expenses paid and expenses for furloughed employees
- Beginning July 1, 2021, any business that experiences a more than 90% decline in gross receipts compared to the same quarter in 2019, may apply the credit to all employee wages (up to the $10,000 per employee per quarter limit) regardless of the 500-employee count limit. Credit is 70% of qualified wages up to a maximum credit of $28,000 per employee for the year.
- Employers who began operations after February 15, 2020 with annual gross receipts less than $1M are eligible for a $50,000 credit per quarter.
Defining “Qualified Wages”
The definition of “qualified wages” depends on the average number of full-time workers employed by the business. In 2020, if an employer had 100 or fewer employees, wages would qualify for the credit if paid to employees whether or not they provided any services. If the employer had more than 100 employees, qualified wages were limited to only those paid to employees who did not provide services due to COVID-19. The employee count is based on full-time employees and full-time equivalent employees in the 2019 tax year. Qualified wages also include the cost of health insurance provided to eligible employees.
The ERTC was modified for 2021 by increasing the employee limit from 100 to 500 employees. If the business had 500 or fewer full-time employees in 2019, it could use wages paid to employees regardless of services provided from January 1, 2021 through December 31, 2021. This increase will allow many more businesses to qualify for the ERTC in 2021.
The Affiliation Rule applies to controlled groups of corporations, commonly controlled businesses, and affiliated service groups. Under this rule, all affiliated entities are treated as a single employer for purposes of counting the number of employees, determining if there has been a significant reduction in gross receipts and whether there has been a full or partial suspension of business under a government order.
PPP Loan Recipients May Be Eligible for the ERTC
Originally, companies could not qualify for the ERTC if they received a PPP loan under the First Draw PPP loan program. However, the Consolidated Appropriations Act (CAA) passed in December 2020, made a significant retroactive change that now allows businesses who received a First Draw PPP loan, or apply for a Second Draw PPP loan, to be eligible for the ERTC, provided that the same wages are not used for both PPP forgiveness and the ERTC. More businesses may be able to retroactively claim the ERTC on 2020 qualified wages. It is important for businesses who are applying for PPP loan forgiveness or are interested in applying for a Second Draw PPP loan to consider carefully planning how to maximize the ERTC for both 2020 and 2021.
How to Claim the ERTC
For the 2021 credit, businesses should report the ERTC on Form 941, Employer’s Quarterly Federal Tax Return. For the 2020 credit, businesses will need to amend their 2020 quarterly Forms 941 to claim the credit. Form 7200 can be filed to get an advanced payment if the credit exceeds the tax on Form 941.
Determining if your business is eligible for the credit can be completed process. We are here to help you maximize the credit you are entitled to receive. We encourage you to consult with your MichaelSilver tax advisor. We can be reached at 847.982.0333.