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Background
ERTC is the acronym for Employee Retention Tax Credit. In simplest terms, the ERTC is a portion of authorized wages paid by employers to their employees. It is one of the relief provisions included in the Coronavirus Aids Relief and Economic Security (CARES) act.
The relief is helping employers keep their employees on payroll during situations that can cause economic recession and depression. The ERTC is 50% of the wages that have been authorized by the employer to be paid to the employee. That has been the rate since March 12th, 2020, and before January 1st, 2021.
Therefore, it is provided in the CARES Act that the highest amount of authorized wages which is considered per employee, is $10,000. That is for all the quarters in the year 2020. Hence, the maximum payment from an employer to any employee in terms of authorized wages is $5,000 during the 2020 calendar year.
Not every employer is eligible to claim the ERTC. To be eligible, your business must have been affected by the COVID-19 pandemic. Self-employed persons and government employers are not qualified for ERTC. Two conditions must be met to qualify an employer to claim ERTC, and according to the IRS website, those conditions are:
● Have operations that were fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
● Experienced a significant decline in gross receipts during the calendar quarter.
“ERTC is the acronym for Employee Retention Tax Credit. In simplest terms, the ERTC is a portion of authorized wages paid by employers to their employees. It is one of the relief provisions included in the Coronavirus Aids Relief and Economic Security (CARES) act.”
Recent Changes
- The ETRC program has now been extended to include all quarters in 2021and include the below key changes:
- 70% credit rate vs 50% of authorized wages;
- Expand eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provide a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility;
- Increases the limit on per-employee creditable wages from $10,000 for the year to $10,000 for each quarter;
- Increases the 100-employee delineation for determining the relevant qualified wage base to employers with 500 or fewer employees;
- Allows specific public instrumentalities to claim the credit;
- Removes the 30-day wage limitation, allowing employers to, for example, claim the credit for bonus pay to essential workers;
- Allows businesses with 500 or fewer employees to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year; and
- Provides rules to allow new employers who were not in existence for all or part of 2019 to be able to claim the credit.
It is pertinent to note that the highest additional amount of qualified wages per employee is $40,000. This is now for Q1 through Q3 of 2021, which would produce an additional ERTC of $21,000 per employee during the 2021 calendar year.
In summary, qualified businesses can now receive up to $26k per qualified employee for 2020 and 2021.
Retroactive Changes
Eligible employers who have received PPP loans can be able to claim ERTC. Under the CARES Act, employers were prohibited from claiming the ERTC when the employer also received a PPP loan. The removal of this prohibition is made retroactive to the date of enactment under the CARES Act. That means employers may now have potential ERTC benefits that did not exist previously.
There is an imposition by the Act, enacted to limit the scope of the retroactive benefit. The Act imposed a special provision that disqualifies an employer in claiming the ERTC on the same wages used to confirm PPP loan forgiveness. An employer chooses to apply wages toward PPP loan forgiveness by making an election not to claim the ERTC.
An employer may not qualify for PPP loan forgiveness; in this case, all of the wages are potentially available for the ERTC. Also, an employer may have incurred more wages than were needed to substantiate PPP loan forgiveness, in which case these “excess” 2020 wages are now available for the ERTC.
The Act provides special rules that employers may use to claim retroactive ERTC benefits. In recognition that payroll tax returns have already been filed for the first three quarters of 2020, the Act permits an employer an election to treat the retroactive ERTC benefits as incurred during the fourth quarter of 2020. For this purpose, the retroactive benefits are based on eligible wages paid after December 31st, 2019, and before October 1st, 2020. Again, the IRS will eventually establish these election procedures, but this election should prevent the need to amend previous payroll tax returns to claim the retroactive ERTC benefits.
Next Steps
The retroactive and new changes to the ERTC have significantly increased its relevance to businesses affected by the coronavirus pandemic.
We are actively helping businesses determine the max amount they can qualify for based on their unique business situation for all available quarters.
Contact us now to set a no-cost consultation or begin your application by clicking below.
The IRS also has a webpage dedicated to the operation of the ERTC with examples of qualifying situations.