Some businesses believe they are not eligible for the Employee Retention Tax Credit, which may be applicable to small to midsize businesses. Think again!
This tax credit, if a business qualifies, can be a powerful, hidden source of cash.
The Employee Retention Tax Credit (ERTC) is a credit that was first put in place in 2020 as a temporary coronavirus relief provision. After numerous head-spinning alterations and clarifications, the most recently passed American Rescue Plan Act (ARPA) yet again extended and modified the ERTC. According to the ARPA, the ERTC now also applies to wages paid in all of 2021.
Thus, an eligible employer can now claim the refundable ERTC against applicable employment taxes (*) equal to 70% of the qualified wages it pays to employees in the third and fourth quarters of 2021 as well.
Mechanics of ERTC
This powerful tax credit applies to different years with different thresholds.
For 2020, if the employer had full or partial shutdown due to a government order (federal, state, or local government) or a 50% or more reduction in gross receipts, they could get up to $5k per employee in tax credits for wages paid between March 12, 2020 and before January 1, 2021. The credit can include certain health insurance payments also.
For 2021, the ERTC eligibility criteria of full or partial government ordered shutdown remains the same, but the reduction in gross receipts test has a lower threshold. If the employer is eligible for the credit based on gross receipts reduction criteria, then for the 2021 ERTC, eligible gross receipts only need to have gone down by 20%.
The tax credit is equal to 70% of the qualified wages a business pays its employees during 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021. Thus, the maximum ERTC amount available is $7,000 per employee per calendar quarter, for a potential total credit of $28,000 per employee in 2021!
The credit applies to businesses with up to 500 employees. Note that this is a refundable payroll tax credit offsetting the employer’s portion of payroll taxes; if the credit exceeds payroll taxes, employers can receive a refund. The cash for the tax credit can be applied for by reducing employment tax deposits the employer would otherwise be required to make OR by filing form 7200. If the ERTC is being applied for 2020 eligible wages, the cash can be obtained by filing amended form 941 employer’s quarterly tax returns as well.
Mistakes businesses are making in evaluating ERTC eligibility
- A business cannot claim the ERTC if it already claimed the PPP loan forgiveness – FALSE. A business can claim both the ERTC and the PPP forgiveness. While a business cannot claim the same wages for both the PPP and ERTC, the business can maximize both PPP and ERTC with proper allocation of eligible wages between ERTC and PPP forgiveness.
- A business cannot claim ERTC unless it has a 50% reduction in gross receipts – FALSE. While one of the 2020 ERTC criteria was a 50% reduction in gross receipts, the 2021 ERTC criteria is only a 20% reduction in gross receipts compared to corresponding 2019 quarters. Even if for 2020, the gross receipts did not go down by 50%, a business may still be eligible for the ERTC due to a partial or full suspension order by federal, state, or local government or a disruption of the business. Inability to access equipment, limited capacity use, shutdown of supply chain or shut down of a supplier/vendor, reduction of business hours to accommodate sanitation – these are all situations that could qualify a business for the ERTC. The key is a business not being able to continue operations in a manner comparable to 2019 and if that disruption resulted in a more than nominal (over 10% of gross receipts) impact on operations.
- A business was deemed essential and therefore does not qualify for the ERTC – FALSE. Even if a business is deemed an essential business, it may still qualify for the ERTC if employees are unable to access a job site. For instance, if an attorney’s access to the courts was limited due the courts being ordered closed, that is an interruption of business that may qualify the business for the ERTC.
- A business has grown during quarantine or suffered losses or does not have tax liabilities or is a nonprofit/charity, so does not qualify for the ERTC – FALSE. The ERTC is a refundable credit and does not require for it to be profitable or to have a tax liability to ensure eligibility for the ERTC. A business that may have grown during the quarantine or suffered losses or have no tax liabilities or be a nonprofit can still qualify for the ERTC and get cash from the government.
- A business with over 500 employees does not qualify for the ERTC – FALSE. The employee count is based on full-time equivalent employees (FTE), which is more involved calculation than a mere counting of heads in the office. In addition, if any employees were paid not to work or paid for hours not worked, the employee count would not take those employees into account. Businesses with employee counts well over 500 may still qualify for the ERTC because the full-time equivalent employees are 500 or less.
ERTC waiting to be tapped
With the ARPA just passed, there are several provisions that impact the ERTC for businesses that started later in 2020 and do not have a 2019 comparable period or did not suffer a decline in gross receipts. There are also provisions for a severely financially distressed business, as well as changes to the statute of limitations relating to the ERTC claims. But the one takeaway from this article should be to review, assess and reassess if your business qualifies for the ERTC. This powerful credit is essentially cash that the government wants to give to businesses if qualified.
(*) Applicable employment taxes are the employer’s share of Medicare (also called hospitalization insurance or HI) taxes (equal to 1.45% of the wages), the amount of the tax under the Railroad Retirement Tax Act payroll tax that is attributable to the employer’s HI tax rate and the employer’s share of Social Security tax (equal to 6.2% of the wages).