In response to the COVID-19 pandemic, Congress enacted several pieces of legislation to help ease the financial burden caused by the virus. The Employee Retention Tax Credit was part of the CARES Act and quickly became one of the most popular forms of government relief available.
The ERTC is a refundable tax credit employers can use to offset taxes owed to the IRS. It has been updated from the original provisions under the CARES Act, and this article walks through what you need to know about the ERTC.
ERTC Provisions Under the CARES Act
The ERTC under the CARES Act allowed employers to claim up to $5,000 in tax credits for each full-time employee retained from March 13, 2020, to Dec. 31, 2020. Employers would qualify if forced to partially or completely shut down by government order, or if gross receipts fell below 50% for the same quarter of 2019.
For example, if a business was not forced to shut down, but its gross receipts fell by 60% from the same quarter in 2019, the business would qualify for the ERTC.
Businesses that received PPP loans were barred from claiming the credit under the CARES Act, but later updates have removed this barrier. Employers can claim the credit immediately against payroll taxes owed. If the amount of payroll tax liability is less than the allowable credit amount, the business should apply to the IRS for a refund of the difference.
What Wages Qualify When Determining ERTC eligibility?
Wages and other forms of compensation are generally eligible to determine the amount of ERTC credit allowable with an important exception. Under the CARES Act, wages that are forgiven or expected to be forgiven under the PPP program were originally excluded from qualified wages. This requirement was later removed with subsequent updates. Qualified health expenses can also be included with eligible wages.
Only a full-time employee’s wages can be counted toward a company’s ERTC. To qualify as a full-time employee the employee must have worked at least 30 hours per week or 130 hours in a month in any calendar month in 2019.
Under the CARES Act, businesses with over 100 full-time employees could only use the credit on employees who were not working. Employers with less than 100 full-time employees could use wages for working employees and those being paid while not working. The only exception to this rule would be employees being paid under the Families First Coronavirus Response Act (FFCRA).
Consolidated Appropriations Act (CAA) Updates to the ERTC
The CAA made several significant updates to the ERTC. First, the employee requirement was increased from 100 to 500. For example, an employer with 400 employees could not count the wages of non-working employees toward its ERTC amount. After passage of the CAA, the same employer can count wages of both working and non-working employees as the threshold was moved to 500 employees.
Next, the CAA removed the requirement that a business not have received PPP loans to claim the ERTC. The CAA update to the ERTC was made retroactive and applies to the period from March 13, 2020, to Dec. 31, 2020. Businesses that were originally disqualified from claiming the ERTC can now claim the credit for that period.
Third, the CAA increased the rate allowed per employee from 50% of qualifying wages to 70% of qualifying wages. In addition, the total allowable amount per employee increased from $10,000 per year to $7,000 per quarter.
Finally, the threshold amount for reduction of gross receipts to qualify for the ERTC was changed from a 50% reduction to a 20% reduction. For example, if a business had gross receipts of $100,000 for the first quarter of 2019 compared with $80,000 for the first quarter of 2021, the business would qualify for the ERTC under the new CAA rules.
American Rescue Plan (ARP) Updates
The American Rescue Plan kept the framework from the CAA and extended the window to claim the ERTC for the entirety of 2021. Qualified employers can claim up to $7,000 per quarter for each employee, or $28,000 for all of 2021.
The ARP expanded the type of employers who qualify for the ERTC to include colleges, universities, hospitals, and certain charitable organizations. In addition, the ARP allowed business to determine eligibility for the ERTC using gross receipts from the immediately preceding quarter rather than the corresponding quarter from 2019. This expansion offers businesses more chances to claim the ERTC.
The mechanics of the ERTC may seem complicated at first but can now be distilled into simple guidelines:
- The business was either fully or partially closed due to a government order. This does not include businesses who could continue to function through teleworking.
- The business experienced a reduction in gross receipts of at least 20% from the corresponding quarter in 2019 or the immediately preceding quarter.
- The business can claim as a credit 70% of the wages of each full-time employee, with a cap of $7,000 per employee for each quarter of 2021.
If you are looking to apply the ERTC to your upcoming tax return, make sure you are working closely with an accountant who can help ensure accurate numbers. To begin working with a trusted source, schedule a consultation with us by clicking the button below.