The Employee Retention Tax Credit (ERTC) is on many companies’ minds. Here, we’ve answered some frequently asked questions—from what it is and how it’s calculated to how guidance from the IRS may impact organizations.
The Employee Retention Tax Credit is an incentive originally created within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) intended to encourage employers to keep employees on the payroll as they navigate the unprecedented effects of COVID-19. Eligible employers can get a refundable payroll tax credit equal to a percentage of eligible wages.
Originally, employers were not allowed to obtain a PPP loan and claim the ERTC. The Consolidated Appropriations Act provided a much-welcomed modification to the CARES Act by allowing all eligible employers to claim the ERTC, even if they have received a PPP loan. The Act also extended the ERTC to early 2021.
The American Rescue Plan (ARP) further extended the ERTC to the end of 2021 (now ending September 30, 2021 with the passing of the Infrastructure Investment and Jobs Act). For 2021, eligible employers can get a credit equal to 70 percent of qualifying wages per quarter. The maximum credit per quarter is $7,000 per employee.
The Infrastructure and Investment Jobs Act made an additional change to the ERTC program. Wages paid after September 30, 2021 are no longer considered eligible wages for ERTC purposes.
You may be asking yourself, what if I already filed Form 7200 for an advance refund or withheld tax deposits in anticipation of claiming the ERTC for the fourth quarter of 2021?
The IRS issued additional guidance this week clarifying the process. If an advance was received for Q4 2021, it will have to be repaid by the due date of Form 941 for the fourth quarter. Failure to repay these funds by that due date will result in the imposition of failure to pay penalties.
For taxpayers who instead reduced their required deposits, the IRS will no longer waive failure to deposit penalties for employers that reduce deposits after December 20, 2021. The amounts withheld from the required tax deposits earlier in the quarter will need to be deposited on or before the due date for Form 941 for wages paid on December 31, 2021.
The notice also suggests taxpayers can appeal to the IRS under “reasonable cause” relief if they don’t qualify under this notice for relief of these penalties.
An eligible employer is an employer that actively carries on a trade or business during calendar year 2020 or 2021, including tax-exempt organizations, and meets either of the two following tests:
Government Order Test: An employer is an eligible employer if it experiences a calendar quarter “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to order from an appropriate government authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19.”
Reduced Gross Receipts Test: An employer is an eligible employer if it experiences a significant decline in gross receipts.
For 2020, a significant decline in gross receipts is defined as a decline in gross receipts of at least 50 percent in any calendar quarter in 2020 when compared to the same calendar quarter in 2019.
For 2021, a significant decline in gross receipts is defined as a decline in gross receipts of at least 20 percent in any calendar quarter in 2021, through September 30, 2021, when compared to the same calendar quarter in 2019.
If this test is failed, a special rule (alternative method) for 2021 allows the eligible employer to use the gross receipts in the immediately previous quarter compared to the same quarter in 2019 to determine a gross receipts decline of greater than 20 percent.
Gross receipts include all receipts received, regardless of whether the amounts are derived in the ordinary course of the taxpayer’s trade or business.
It’s also important to note that there are affiliation rules that apply to commonly owned businesses which could impact eligibility for the credit.
The number of average full-time employees is important because this calculation determines which wages would be available for the credit.
There are different definitions for eligible wages based on whether the employer is a small or large employer. In order to determine the employer status for the ERTC, the average number of full-time employees employed during 2019 must be determined.
The 2019 reference period for the full-time employees calculation is to be used for both the 2020 and 2021 eligibility period.
For 2020 credits, an eligible employer is deemed to be a small employer if they have 100 or fewer average full-time employees.
For 2021 credits, an eligible employer is deemed to be a small employer if they have 500 or fewer average full-time employees.