Employee Retention Tax Credit Creates Tax Refund Opportunities

Blog
March 30, 2021

The Consolidated Appropriations Act of 2021 signed into law on December 27, 2020 expanded both which employers are eligible for Employee Retention Tax Credit (ERTC) in 2020 but it also extended ERTC into the first two quarters of 2021. The ERTC is a refundable payroll tax credit that was first introduced by the CARES Act in March 2020.

The payroll tax credit is claimed on the quarterly employment tax return (Form 941). If the amount of credit exceeds the employment tax deposits, the employer can apply for an advance payment of the credit on IRS Form 7200 as long as Form 7200 is filed by the filing due date of Form 941 for the specific quarter.

The American Rescue Plan Act of 2021 signed into law on March 11, 2021 extended ERTC for the remainder of 2021.

Below is a summary of how the ERTC works in both 2020 and 2021.

2020 ERTC

  • Available to wages paid between March 13, 2020, and December 31, 2020
  • Available to business owners that employ less than 100 employees. The employees of all affiliated companies with common ownership must be treated as a single employer for purposes of determining if there are 100 or more employees.
  • Can access ERTC if the business owner had operations that were fully or partially suspended due to COVID-19 or experienced a significant decline in gross revenue of at least 50% in gross revenue in one quarter of 2020 compared to that same quarter in 2019
  • Equal to 50% of wages paid to each employee up to a maximum of $10,000 per employee per year.
  • Employer must later determine if there is a later calendar quarter in 2020 in which the quarterly gross receipts are greater than 80% of their gross receipts for the same calendar quarter in 2019. If so, the significant decline in gross receipts ends with the first calendar quarter that follows the first calendar quarter in which the employer’s 2020 quarterly gross receipts are greater than 80% of its gross receipts for the same calendar quarter in 2019.
  • Employers can claim both the ERTC and the Paycheck Protection Program (PPP) loan as long as PPP funds aren’t used to fund the wages that are eligible for the ERTC.

2021 ERTC

  • Available in the 1st and 2nd quarters of 2021 on what is believed to be a quarter by quarter election
  • Available to business owners that employ less than 500 employees. The employees of all affiliated companies with common ownership must be treated as a single employer for purposes of determining if there are 500 or more employees.
  • Can access ERTC if the business owner had operations that were fully or partially suspended due to COVID-19 or experienced a significant decline in gross revenue of at least 20% in gross revenue during 1st or 2nd quarter of 2021 compared to that same quarter in 2019. If an employer can’t satisfy the gross receipts test in 1st quarter 2021, they can make an election to compare the gross receipts in 4th quarter 2020 to 4th quarter 2019 to determine if there was a decline in gross revenue of at least 20%.
  • Employers not in service in 2019 would compare the same quarter in 2020 to see if they meet the 20% revenue decrease test
  • Credit is equal to 70% of wages paid to each employee per quarter up to a maximum of $10,000 per quarter
  • Employers can claim both the ERTC and the Paycheck Protection Program (PPP) loan as long as PPP funds aren’t used to fund the wages that are eligible for the ERTC

With employers now being able to claim both the ERTC and PPP, there were will be substantial tax refund opportunities for employers in 2020. Business owners should consult with their tax accountants to determine their eligibility for the ERTC.