The employee retention tax credit (ERTC) is intended to provide liquidity to employers during the pandemic and was greatly expanded in the Consolidated Appropriations Act of 2021 thanks to Sections 206 and 207 of the Taxpayer Certainty and Disaster Relief Act portion, opening the doors to more businesses to be able to qualify for and receive this credit who are facing significant hardship as a result of the coronavirus pandemic. Many changes from the original credit were enacted including an expansion in the amount of credit and business eligibility, and how it plays with the Paycheck Protection Program (PPP).
Who is eligible for the ERTC?
The following businesses and organizations engaged in a trade or business are eligible to qualify for the ERTC:
- For-profit businesses
- Tax-exempt organizations
- Certain government entities that are state or local-run (Effective Jan. 1, 2021, previously no government entity at any level was eligible):
- Colleges or universities
- Organizations providing medical or hospital care
- Certain organizations charted by Congress (such as Fannie Mae, FDIC, Federal Home Loan Banks and Federal Credit Unions)
How does my business qualify for the ERTC?
The rules are different for 2020 versus 2021.
- The eligible employer fully or partially suspends operation during any 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 experiences a significant decline (50% or more) in GROSS RECEIPTS during the calendar quarter versus the same quarter in 2019.
- The eligible employer had 100 or fewer full-time employees in 2019
- Eligible employers can receive a refundable payroll tax credit of 50% of up to $10,000 total wages paid (i.e. $5,000) for EACH employee between March 13,2020 and December 31, 2020 providing those wages are NOT paid with PPP monies.
- Wages paid for compliance with the Families First Coronavirus Response Act (FFCRA ) are excluded from the employee retention credit.
- A significant decline in gross receipts is defined as 20% or more during the calendar year 2021 vs the same calendar year in 2019 OR A safe harbor may be used in which the previous quarter – i.e. 4th quarter 2020 in the case of the 1st quarter 2021 – can be used to meet the 20% test for first quarter 2021
- Example – an eligible employer’s gross revenues in October – December 2019 were $750,000 and $300,000 for October – December 2020. The last date PPP funds were used to pay wages was September 2020. The employer would be eligible for the 2020 50% retention credit since the gross revenues decreased 60%. In addition, due to the safe harbor rule available for 2021, they would be eligible for the 70% retention credit for the first quarter of 2021, even if the first quarter 2021 gross revenues ended up not meeting a 20% decline from the first quarter of 2020.
- To date, there appears nothing from preventing an employer from using the safe harbor method in one quarter of 2021, then switch to comparing the same quarter to 2019 in a different quarter.
- The eligible employer had 500 or fewer full-time employees in the prior quarter.
- The 70% refundable retention credit is available for total wages up to $10,000 for EACH of the first and second quarters of 2021. So the total maximum credit per employee is $14,000, up from the $5,000 annual limit in 2020.
- Again, these wages must NOT be paid with PPP monies in order to be eligible for the retention credit.
PPP loans and the Employee Retention Credit
There is potential to qualify for and receive both the PPP loan and claim the Employee Retention Credit as long as you are not using the same qualified wages for both. If you think you may qualify for both, you should contact us to go over the rules of each program to stay compliant while working to maximize the benefit of each.