A refundable credit against payroll taxes was introduced when the CARES Act was signed into law on March 27, 2020, known as the Employee Retention Tax Credit (ERTC). Determining eligibility for the credit is based on quarterly revenue reductions or mandated shutdowns of your business due to COVID-19. The ERTC was further modified to expand eligibility and maximum credit amounts under two additional laws over the prior twelve months, the Consolidated Appropriations Act, and the American Rescue Plan Act. The ERTC allows qualifying employers, including those that received PPP loans, to receive this credit based on qualified wages paid to employees (including certain health insurance costs) paid during specific periods.
Credit Amounts by Period
2020 – Qualifying employers, including those who received a loan under the initial PPP, can claim the ERTC against 50% of qualified wages paid, up to $10,000 annually per employee for wages paid between March 13, 2020 and December 31, 2020. The maximum credit per employee in 2020 is $5,000.
2021 – Qualifying employers, including PPP recipients, can claim the ERTC against 70% of qualified wages paid, up to $10,000 quarterly per employee for wages paid between January 1, 2021 and October 1, 2021. The maximum credit per employee in 2021 is $21,000.
Qualifying for the ERTC
To be eligible to claim the Employee Retention Tax Credit, employers meet one of two determining factors, and one of these factors must be applicable in the calendar quarter the employer wants to apply for the credit:
- The trade or business was fully or partially suspended or had to reduce business hours due to a government order (the credit would only apply for the portion of the quarter the business is suspended under this factor, not the entire quarter). There are two caveats to qualifying under this factor:
- Businesses considered essential are ineligible for qualification under this factor, unless supplies of critical goods or materials are disrupted which impacts their ability to operate.
- Businesses that closed on-site operations but continued operations through telework/remote access are also ineligible for qualification under this factor.
- Employers must show a percentage revenue reduction based on the period they are claiming the credit:
- Qualifying for a calendar quarter in 2020 – Employers must show a reduction in gross receipts of 50% for the calendar quarter they’re applying for in 2020 versus the same quarter in 2019. Eligibility continues for each subsequent quarter until quarterly gross receipts exceed 80% compared to the same calendar quarter in 2019.
- Qualifying for a calendar quarter in 2021 – Employers must show a reduction in gross receipts of 20% for the calendar quarter they’re applying for in 2021 versus the same quarter in 2019. For 2021, you may also elect to show a reduction based on the immediately preceding quarter (example, if your revenue in Q4 2021 is 20% lower than Q3 2021, you may elect to use this quarter to qualify under this factor instead of Q4 2019).
Calculating Qualified Wages
Qualified wages include all wages/compensation paid to employees that are subject to FICA taxes, however, wages paid with PPP loan proceeds that were forgiven, or will be forgiven, do not qualify. Qualified wages also do not include any amounts included in the Work Opportunity Tax Credit or for amounts employees received under paid family medical leave or the coronavirus sick leave. In addition to wages/compensation, employer paid health expenses can generally be included as long as they were payments made to maintain a group health plan and excluded from gross income of the employee.
When determining what wages are eligible for the credit, employers must first calculate the number of full-time employees they averaged in 2019. For purposes of the ERTC, full-time employees are defined as those that worked at least 30 hours per week, or 130 hours in a month.
Calculating the Credit for 2020 Qualified Wages Paid – If you averaged more than 100 full-time employees in 2019, only wages paid to employees that were retained and not working in 2020 can be claimed. If you employed 100 or fewer full-time employees, all qualified wages paid to employees are eligible, whether they are working or not.
Calculating the Credit for 2021 Qualified Wages Paid – If you averaged more than 500 full-time equivalent employees in 2019, only wages paid to employees that were retained and not working in 2021 can be claimed. If you employed 500 or fewer full-time employees, all qualified wages paid to employees are eligible, whether they are working or not.
Claiming the ERTC
Eligible employers will report their total qualified wages for purposes of the Employee Retention Tax Credit for each calendar quarter on their federal employment tax returns, usually Form 941, Employer's Quarterly Federal Tax Return. An eligible employer may reduce its federal employment tax deposit by the qualified wages that it has paid. If the total credit exceeds the employer’s portion of Social Security taxes, the excess will be refunded.
The American Rescue Plan act will change the nonrefundable piece of the ERTC to be claimed against Medicare taxes beginning on July 1, 2021, however this will have no impact on the credit amount and is solely to lessen the reduction of Social Security taxes paid in.
In addition, if a Form 941 has already been filed and it is now determined that the Employee Retention Tax Credit is available, an amended Form 941-X can be filed.
Conlon & Company strongly suggests reaching out to your payroll provider as soon as possible to determine your eligibility and filing requirements for the credit.
Kevin G. Conlon, CPA/PFS