As the COVID-19 pandemic and related shutdowns began having a detrimental impact on businesses in 2020, many made the difficult decision to lay off employees, either temporarily or permanently. However, as a way to incentivize businesses to keep employees on the payroll despite uncertain economic conditions, the federal government created a powerful mechanism for financial relief: the Employee Retention Tax Credit (ERTC). Although the ERTC was enacted in 2020 under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and is only available for wages paid through September 30, 2021, there is still time for eligible businesses to claim this lucrative credit. Therefore, employers are encouraged to review the following information about the ERTC and consult their tax professionals to see if they may qualify.
How Does the ERTC Work?
Designed to reward businesses that retained their employees during the pandemic and help them offset the costs of doing so, the ERTC provides cash-flow relief in the form of a refundable employment tax credit applied against the federal payroll tax liability. This means that employers will receive a refund for the difference if the amount of the credit is larger than the payroll tax they owe. For example, if a business owes $10,000 in taxes and qualifies for a credit of $100,000, they will receive a $90,000 refund after offsetting/eliminating the $10,000 tax.
The ERTC is worth up to $5,000 per employee for 2020 and up to $21,000 per employee for 2021. Specifically, the credit is 50% of all qualified wages paid to employees between March 12 and December 31, 2020, up to $10,000 per employee for the year—which amounts to a maximum credit of $5,000 for each employee in 2020. During this time period, the definition of qualified wages depends on how many full-time employees a business had as of 2019: if the business had 100 or fewer full-time employees, “qualified wages” include wages paid to all employees, whether or not they were working despite mandatory shutdowns. For businesses with more than 100 employees, on the other hand, qualified wages only include those paid to employees who were not providing services due to a full or partial suspension of operations by pandemic-related government order, or the fact that the business had experienced a significant decline in gross receipts.
The ERTC was first amended by the Relief Act of 2021, which increased the maximum credit amount to 70% of qualified wages. Subsequent legislation (the American Rescue Plan Act of 2021 and the Infrastructure Investment and Jobs Act) extended the credit, thereby allowing eligible employers to claim an ERTC of 70% of qualified wages paid between January 1 and September 30, 2021, up to $10,000 per employee for each quarter—which amounts to $7,000 per employee per quarter, or $21,000 per employee for 2021.
The Relief Act of 2021 also adjusted the requirements for qualified wages. Instead of the previous threshold of 100 full-time employees, businesses with 500 or fewer employees may count wages paid to employees both providing and not providing services as qualified wages in 2021. For those with more than 500 employees, only wages paid to employees who were not working due to government-mandated shutdowns or a significant decline in gross receipts may constitute qualified wages.
Who is Eligible for the ERTC?
Since the ERTC was designed to assist businesses that were heavily impacted by the pandemic, it is only available to those that meet the following criteria:
- Operations were fully or partially suspended due to a pandemic-related government order; OR
- The business experienced a significant decline in gross receipts during a calendar quarter in 2020 or 2021. (Generally, for 2020, this is defined as gross receipts less than 50% of those in the same quarter in 2019. For 2021, it’s less than 80% of the same quarter in 2019.)
The American Rescue Plan Act of 2021 extended eligibility for the ERTC to a new group of employers: recovery startup businesses. These are defined as businesses that:
- Began operations after February 15, 2020;
- Had average annual gross receipts under $1,000,000 for the three-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined; and
- Do not meet the other eligibility criteria.
Recovery startup businesses may claim the ERTC for wages paid through December 31, 2021 (rather than September 30), with a total credit amount of up to $50,000 per quarter.
Can You Claim the ERTC If You Received a PPP Loan?
Another major initiative designed to help businesses weather the pandemic was the Paycheck Protection Program (PPP), which provided funding to aid employers in covering payroll costs and benefits, as well as interest on mortgages, rent, and utilities. Initially, businesses could not qualify for the ERTC if they had received a PPP loan. However, the Consolidated Appropriations Act, 2021 allowed businesses that had received PPP loans to qualify for the ERTC retroactive to March 13, 2021, as long as the qualified wages under the ERTC were not paid using PPP funds. In addition, the forgiven amount of a PPP loan will limit the ERTC. For instance, if a business qualifies for an ERTC of $130,000, but had $30,000 of PPP loans forgiven, it will only be able to receive a maximum ERTC of $100,000.
The interplay between the ERTC and PPP loans can be complex, so employers should check with their tax advisors to determine the best strategy for maximizing financial relief under both incentives.
Claiming the ERTC
Although the ERTC is only available to most businesses for qualified wages paid through September 30, 2021, the credit may still be claimed within three years of an employer’s 2021 tax filing. Businesses must apply using an amended Form 941X. Various forms of documentation may be required, including:
- Profit and loss statements for all quarters from 2019-2021
- Form 941 for Q1-Q3 2021
- PPP loan records and loan forgiveness letters (if applicable)
- Detailed payroll records by quarter for 2020 and the first three quarters of 2021
For eligible businesses, working with an experienced tax advisor is the key to maximizing refundable tax credits through the ERTC. Most primary CPAs are consumed with tax filings and are not up to date on the most recent changes to the credit, so they may not be able or willing to properly pursue an ERTC claim.
At CRG, our team of tax professionals has helped our clients recover millions of dollars through the ERTC. We will determine whether your business is eligible and guide you through the process of claiming the credit, with a goal of minimizing your tax burden and increasing your cash flow. If you think your business may qualify for the ERTC, now is the time to act. Contact CRG today to schedule a consultation!