What You Should Know About the Employee Retention Tax Credit (ERTC)

Many businesses are concerned about the Employee Retention Tax Credit (ERTC). From what it is and how it is calculated to how IRS advice may affect organizations, we've answered some frequently asked questions below.

The Employee Retention Tax Credit (ERTC) is a tax credit that encourages employers to keep their best employees.

The Employee Retention Tax Credit was introduced as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to encourage firms to keep their employees on the payroll as they deal with the devastating impacts of COVID-19. A refundable payroll tax credit of a percentage of qualified salaries is available to eligible employers.

Employers could not get a PPP loan and then claim the ERTC at first. The Consolidated Appropriations Act made a much-needed change to the CARES Act, allowing all qualifying employers to claim the ERTC, even if they had taken out a PPP loan. The ERTC was also extended until the beginning of 2021, as part of the Act.

The ERTC was extended to the end of 2021 by the American Rescue Plan (ARP) (now ending September 30, 2021 with the passing of the Infrastructure Investment and Jobs Act). Eligible companies will be able to receive a credit equal to 70% of qualifying earnings per quarter beginning in 2021. Employees can receive up to $7,000 in credit each quarter.

A new adjustment to the ERTC program was introduced by the Infrastructure and Investment Jobs Act. For the purposes of the ERTC, wages paid after September 30, 2021 are no longer considered eligible wages.

What Types of Businesses Qualify for the Employee Retention Tax Credit?

An qualified employer, including tax-exempt organizations, is one that actively engages in a trade or business during calendar years 2020 or 2021 and meets one of the two tests:

A calendar quarter "in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to an appropriate government authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19" qualifies an employer as an eligible employer.

Reduced Gross Receipts Test: If a company's gross receipts drop significantly, it's an eligible company.

A major drop in gross receipts in 2020 is defined as a drop of at least 50% in any calendar quarter compared to the same calendar quarter in 2019.

A significant drop in gross receipts in 2021 is defined as a drop in gross receipts of at least 20% from the same calendar quarter in 2019 to the same calendar quarter in 2021.

If this requirement is violated, a special regulation (alternative method) for 2021 allows the qualifying employer to calculate a gross receipts fall of more than 20% by comparing gross receipts in the immediately preceding quarter to the same quarter in 2019.

Gross revenues include all money received, regardless of whether it was earned in the ordinary course of the taxpayer's business.

It's also worth noting that for generally owned enterprises, there are affiliation requirements that may affect credit eligibility.

Do you need assistance evaluating whether your business is eligible for the Employee Retention Tax Credit? Get a visual aid to determining your eligibility with the ERTC Decision Helper.

How can I know if I'm a small or large employer?

The number of full-time employees on average is significant since it determines which pay are eligible for the credit.

Depending on whether the employer is a small or large company, different definitions apply to qualified salaries. The average number of full-time employees employed during 2019 must be calculated in order to determine the ERTC's employer status.

For both the 2020 and 2021 eligibility periods, the 2019 reference period for full-time employees calculations will be applied.

If an employer has 100 or fewer typical full-time employees, it is considered a small employer for 2020 credits.

If a company has 500 or fewer typical full-time employees, it is considered a small company for 2021 credits.

What are the Employee Retention Tax Credit Eligible Wages?

All earnings and health insurance benefits paid to an employee during the period when the employer is designated an eligible employer are considered eligible wages under the ERTC for a small employer.

Earnings and health insurance benefits paid to an employee who is unable to provide services owing to the pandemic's impacts are deemed eligible wages under the ERTC for an eligible employer that is not a small company.

Furthermore, the amount of qualifying earnings paid to an employee in this category cannot exceed the amount paid to the employee 30 days prior to the pandemic.

Wages paid for employment between March 13, 2020 and December 31, 2020 are considered qualifying wages under this provision.

Wages paid for employment between January 1, 2021, and September 30, 2021 are considered qualifying wages under this rule.

Only qualifying wages can be paid if the employer qualifies. As a result, if an employer no longer fits the eligibility requirements, the credit is often no longer available.

What is the method for calculating the Employee Retention Tax Credit?

In 2020, the total amount of qualifying wages earned to each individual employee for all calendar quarters that can be utilized to calculate the ERTC is capped at $10,000. In other words, for all calendar quarters in which qualified wages are paid, the employer is entitled to a maximum $5,000 ($10,000 x 50%) credit per employee.

In 2021, the total amount of ERTC-eligible salaries paid to each individual employee cannot exceed $10,000 per quarter. To put it another way, for each calendar quarter in which qualified earnings are received, the employer is granted a maximum credit of $7,000 ($10,000 x 70%). Any qualified wages used to calculate the ERTC are not counted as wages for other tax credits or PPP loan forgiveness purposes.

The ERTC is taxable since the amount of the credit is deducted from the employer's total pay deductions.

How Do I Get the ERTC for My Company?

The ERTC is a payroll ertc tax credit, not an income tax credit, that must be recorded on Form 941 at the end of the year. Employers who are eligible for the ERTC can claim it by calculating the amount of the ERTC for a pay period and subtracting that amount from the mandatory payroll deposit.

Employers can minimize their employment tax deposits with the IRS or request an advance of the ERTC on Form 7200 Advance Payment of Employer Credits Due to COVID-19 in anticipation of receiving the ERTC.

Small businesses (with fewer than 500 full-time employees) are eligible for advance payments, although there are several restrictions:

In calendar year 2019, advance payment shall not exceed 70% of the employer's average quarterly wages.

An employer who did not exist in 2019 can use the employer's average quarterly earnings paid in calendar year 2020.

With a true increase or down at the end of the applicable quarter, advance ERTC must be reconciled against real ERTC.

The excess of the ERTC over the OASDI taxes imposed on the employer is recognized as a refundable overpayment during any calendar quarter in which the ERTC exceeds the OASDI taxes levied on the employer.

In this episode of The Wrap podcast, learn more about the Employee Retention Tax Credit and hear the narrative and perspective of a firm that has taken advantage of it.

What's with the IRS's New ERTC Guidance?

The IRS published long-awaited guidelines on the ERTC on March 1, 2021, and April 2, 2021 (IRS Notice 2021-20 and 2021-23).

The New Notices' Specifics

The PPP and ERTC will work together in the future, according to Notice 2021-20. The process of making an election and dealing with excess wages used on a loan application is explained in a Q&A format. The interaction is addressed in question 49 of the notice, which includes seven comprehensive illustrations of different circumstances. In a nutshell, the following is a summary of the situation:

If you reported all qualifying earnings on your PPP debt forgiveness application in addition to your other expenses, resulting in a surplus of total expenses, the excess payroll expenses can be used to meet the ERTC eligibility requirements.

You cannot go back and revise the application after the fact if you have any excess expenses in addition to your payroll that were not stated on the application.

The election is made by simply not claiming the ERTC on the applicable 941 form for those specific salaries, according to the new advice.

The ERTC guidance for the first and second quarters of 2021 is contained in Notice 2021-23, which includes more information on definition revisions and other ERTC updates for 2021.

Additional Notes on the New Notices that are Beneficial

The letters also contained additional specifics on how to claim the 2020 and 2021 credits, as well as information on how they relate with other deferrals, the definition of salaries, and the necessary documentation.

The ARP not only prolonged the ERTC until the end of 2021, but it also enlarged it in a number of ways, including adding new categories for recovery startups and severely distressed employers.

In August 2021, the IRS was quite busy issuing new advice. First, the IRS published Notice 2021-49, which gives guidance for the third and fourth quarters of 2021, discusses the new programs, and expands on previous notifications 2021-20 and 2021-23, answering many of our outstanding issues.

The following are a handful of the most important issues discussed:

If you're getting ERTC credits for 2020, you'll have to lower your 2020 salaries to compensate. You will need to revise your 2020 tax return if you have already filed it.

Monthly "tip" wages of $20 or more are eligible for ERTC, and both the ERTC and the tip credit can be used on the same pay.

Part-time workers aren't counted when determining whether a firm is small or large.

Revenue Procedure 2021-33, published by the IRS, establishes a safe harbor for determining gross receipts. PPP loan forgiveness, Shuttered Venue Operator Grants, and Restaurant Revitalization Grants are not included in gross receipts, as per the Revenue Procedure. For people who had COVID-19 aid in the past, this is helpful advice.