The Internal Revenue Service is urging employers to take advantage of the Employee Retention Tax Credit (ERTC), a refundable tax credit, which has been extended and increased through the first six months of 2021.
The credit, designed to aid employers that choose to keep employees on the payroll during the COVID-19 pandemic, was part of the CARES Act and originally set to expire at the end of 2020.
Congress extended and expanded the credit by passing the Taxpayer Certainty and Disaster Tax Relief Act of 2020 on December 27, 2020.
Employers need to examine the credit, extended through June 30, 2021, closely as some changes apply only to 2021 and some apply to both 2020 and 2021.
ERTC Increases up to $14K Per Eligible Employee in 2021
Perhaps the biggest change of the new legislation is increasing the total credit per eligible employee from $5,000 total in 2020 to $14,000 total in 2021.
- For 2020: Eligible employers can claim a refundable tax credit against the employer share of Social Security tax equal to 50 percent of the qualified wages they paid to employees between March 27 and December 31, 2020. Qualified wages are limited to $10,000 per employee per the calendar year for a total maximum credit of $5,000.
- For 2021: Eligible employers can claim a refundable tax credit against the employer share of social security tax equal to 70 percent of the qualified wages they paid to employees between Jan. 1 and June 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter. The maximum ERTC credit for 2021 then is $7,000 per quarter, for a total of $14,000.
According to the IRS: “Employers can access the [ERTC] for the 1st and 2nd quarters of 2021 prior to filing their employment tax returns by reducing employment tax deposits. Small employers (i.e., employers with an average of 500 or fewer full-time employees in 2019) may request advance payment of the credit (subject to certain limits) on Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. In 2021, advances are not available for employers larger than this.”
Qualifying wages for the ERTC includes any qualified health plan expenses/premiums employers paid on behalf of the employee. This generally includes both the portion of the health-insurance cost paid by the employer and the portion of the cost paid by the employee with pre-tax contributions.
Employer Eligibility Requirements For 2021 ERTC
Any sole proprietor, limited liability company, S-Corporation or C-Corporation, operating a trade or business between Jan. 1 and June 30, 2021 can qualify for the ERTC if they experience either:
- A full or partial suspension of the operation of their trade or business during this period because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- A decline in gross receipts in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80 percent of the gross receipts in the same calendar quarter in 2019 (to be eligible based on a decline in gross receipts in 2020 the gross receipts were required to be less than 50 percent).
The IRS says that employers that did not exist in 2019 can use the corresponding quarter in 2020 to measure the decline in their gross receipts.
For the first and second calendar quarters in 2021, employers may elect in a manner provided in future IRS guidance to measure the decline in their gross receipts using the immediately preceding calendar quarter (i.e., the fourth calendar quarter of 2020 and first calendar quarter of 2021, respectively) compared to the same calendar quarter in 2019.
In addition, effective January 1, 2021, the definition of qualified wages was changed to provide:
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services. Previously, this provision only applied to employers with fewer than 100 employees.
Businesses That Received PPP Loans in 2020 Now ERTC Eligible
Previously, businesses that received Paycheck Protection Program (PPP) loans were not eligible to claim the ERTC but that has been change retroactively to March 27, 2020. Employers that received PPP loans can now claim the ERTC for qualified wages that are not treated as payroll costs in obtaining forgiveness on their PPP loan.
Note that the latest round of PPP deadline is March 31, 2021 so some small business owners are delaying applying for PPP until the deadline to maximize the ERTC they can receive.
CPA Mark J. Kohler, co-host of the Podcast MainStreet Business has worked through several scenarios that businesses might find helpful when it comes to the ERTC. Also consult this U.S. Chamber of Commerce ERTC guideline for more details.
Employers should consult their tax advisors for the latest updates on the ERTC and how best to claim the credit.
We know that all of this information can be confusing and overwhelming. Please reach out if there is anything we can do to help.