In response to the pandemic, the employee retention tax credit (ERTC) was created under the CARES Act in March 2020. ERTC is a refundable payroll tax credit that in its two years of existence has yielded large tax refunds for many business owners of all sizes in various industries. While the credits are specifically for tax years 2020 and 2021, there is still time to request refund claims for these years. Below is a comprehensive summary of how to qualify for the credit in both years along with a summary of the potential refunds that ERTC could potentially yield.
Availability of ERTC
- 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.
- Wages paid between March 13, 2020 and December 31, 2020 are potentially eligible for ERTC.
- 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.
- Wages paid between January 1, 2021 and September 30, 2021 are potentially eligible for ERTC.
Qualifying for ERTC: Decline in Revenue
Most business owners that have obtained ERTC in 2020 and 2021 have done it by ways of demonstrating a significant revenue decline. To qualify for ERTC as a result of a significant revenue, the following must be demonstrated respectively in 2020 and 2021:
- A 50% or more decline in gross revenue in one quarter of 2020 compared to that same quarter in 2019
- Employer must later determine if there is a later calendar quarter in 2020 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.
- A 20% or more decline in gross revenue in one quarter of 2021 compared to that same quarter in 2019
- If an employer can’t satisfy the gross receipts test in a specific quarter of 2021, they can elect to compare the gross receipts of prior quarter to that same quarter in 2019 to determine if there was a decline in gross revenue of at least 20%. (e.g. qualify for ERTC for 2021 1st quarter if gross revenue in 4th quarter 2020 is down at least 20% compared to 4th quarter 2019).
Qualifying for ERTC: Suspension of Operations
Business owners that don’t qualify for ERTC under the significant revenue decline test could claim ERTC on wages paid out during a period in which the business operations experienced a full or partial suspension of operations due to COVID-19. To qualify for ERTC under suspension of operations, the following items would need to be met:
- The full or partial suspension operations must be the result of a government order.
- The gross receipts from the portion of business that have been suspended must make up at least 10% of the employer’s total gross receipts.
Value of the Credits
- Equal to 50% of wages paid to each employee up to a maximum of $10,000 in wages per employee per year
- Credit is equal to 70% of wages paid to each employee per quarter up to a maximum of $10,000 in wages per quarter.
Other Important Information
- ERTC is also available for nonprofit organizations.
- Employers can claim both the ERTC and the Paycheck Protection Program (PPP) loan as long as the PPP funds aren’t used to fund the same wages that are allocated towards ERTC.
- If ERTC was not claimed on the originally filed quarterly employment tax returns (Form 941), employers can still claim ERTC by filing an amended quarterly employment tax return (Form 941X).
- When measuring the eligibility for ERTC as the result of a significant revenue decline, the gross revenue decline must be measured using the same accounting method that a business owner or an organization uses on their annual income tax return filing.
- Wages paid to more than 50% owners or individuals that are related to the more than 50% owners are ineligible for ERTC.
- Employers have three years from the original filing due date of Form 941 to claim a refund for ERTC (e.g. Form 941 for 2021 1st quarter was originally due April 30, 2021, employers have until April 30, 2024 to file a refund claim).
- Business owners that claim ERTC must reduce the deductible wages on their corporate or pass-through entity tax returns equal to the value of the credits in the year ERTC is incurred (regardless of the when the ERTC funds are received).
- Businesses or organizations that began operations after the pandemic may qualify for ERTC as a Recovery Startup Business.
Business owners and nonprofit organizations should consult with their tax accountants to determine their eligibility for the ERTC.