The Employee Retention Tax Credit program probably isn’t news to you. It was created back on March 27, 2020 along with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). Many employers couldn’t take advantage of it initially because they were required to choose between the ERTC and Paycheck Protection Program (PPP) loans. Now, though, many more employers can take advantage of the ERTC—and retroactively, as well as with a higher financial gain for this year. MP’s HR services team reveals everything you need to know to fully utilize this program and infuse cashflow back into your payroll system.
Eligibility for the Employee Retention Tax Credit
There are a few key criteria for meeting eligibility for the ERTC. All of them have been relaxed greatly since December 2020, allowing more people to qualify. These criteria come down to a shutdown, revenue, PPP loans, and the number of employees.
One part of qualifying for an Employee Retention Tax Credit could be demonstrating that your business either had to close its operations partially or fully due to a state or federal government order. If neither occurred, your business could still meet eligibility via a revenue requirement.
The qualifications for the ERTC based on revenue are twofold. Firstly, to qualify (even retroactively) in 2020, employers needed to be able to show a loss in revenue (by gross receipts, as defined by §6033) by 50% for a calendar quarter as compared with the same quarter in 2019, that has gone down. Employers who can demonstrate this kind of loss will qualify until the first day of the quarter post the quarter when their revenue exceeds 80% of the collections for the same time period in 2019.
In 2021, employers must show that they had a 20% loss (by gross receipts) in the first two quarters of the year as compared to the same quarters of 2019.
Employers may choose to use the prior quarter gross receipts to prove eligibility for the ERTC. This would mean, for example, that to receive an ERTC for the first quarter of 2021, they could compare the fourth quarter of 2020 to the fourth quarter of 2019. Employers can compare quarters from 2021 to 2020 if they weren’t in business at the start of the relevant quarter in 2019.
- PPP loans
As mentioned earlier, employers who have received PPP loans may now also qualify for the ERTC program. This change is retroactive as of March 13, 2020. This means that employers who previously couldn’t obtain an ERTC because they had PPP loans can now do so for 2020. If they have qualified wages that were paid out from March 13, 2020 through to June 30, 2021, they can receive an ERTC.
HR and payroll experts note that there is one caveat to this interaction between PPP loans and the ERTC program. Employers may not gain an ERTC credit from employee wages and have that money be forgiven on a PPP loan. This “double-dipping” is not allowed. Instead, employers will want to separate periods to be able to take advantage of both programs.
- Number of Employees
Whenever calculating employee count for purposes of ERTC, employers will want to use 2019 data. The size of a business is determined by the average number of employees who worked 30 or more hours a week in 2019.
For claiming 2020 credits, anyone over 100 full-time employees is considered a large employer. For the 2021 credits, the employee count jumps to 500 full-time before an employer is considered “large.”
The amount you can claim per year, per employee
An employer can claim different amounts in 2020 and 2021. For 2020, an employer can claim up to 50% of an employee’s wages up to $10,000, thus maxing out at $5,000 per employee for the year. In 2021, employers can claim up to 70% of a full-time employee’s wages for up to $10,000 in the first and the second quarter of the year. That caps out at $14,000 per employee in 2021.
Businesses who qualify as “Large Employers” may only claim credit for wages paid to employees who weren’t working. This may be in the form of pay to employees while on furlough, or the employer’s contribution to the furloughed employees’ health insurance.
Businesses under the large employer threshold can claim credit for wages to all employees working or not.
- The time periods can you apply for an ERTC for
An employer can apply for an Employee Retention Tax Credit for all of 2020, as well as the first two quarters of 2021. The program expires after June 30, 2021. They must, of course, be eligible for the time period they are applying for. See above for eligibility requirements.
- How an Employee Tax Retention Credit can be paid out
Employers can expect to receive their ERTC in a few different ways. It can be directly applied to what they owe in taxes, reducing their bill. If the amount exceeds what the employer owes, they will get the tax credit paid through a tax refund. If an employer will be getting an ERTC and need it sooner, perhaps to get through the difficult economy of the pandemic, they can request an advance payment via Form 7200. MP’s clients will be able to utilize the system to claim credits in current pay periods.
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