The Employee Retention Tax Credit (ERTC) is a COVID relief program that may provide substantial relief for certain organizations.
The refundable ERTC was initially established starting March 27, 2020, to cover 50 percent of up to $10,000 in qualified wages paid by certain eligible employers whose businesses have been financially impacted by COVID-19 throughout 2020. The ERTC was previously extended to run throughout 2021; however, it was recently sunset retroactively to expire on September 30, 2021. Effective January 1, 2021, the amount of the ERTC was increased to 70 percent (up from the 50 percent threshold included in the CARES Act) of up to $10,000 per calendar quarter (up from $10,000 total for the remainder of 2020) of qualified wages paid to an employee. Thus, for Q1 2020 through Q3 2021, the maximum tax credit available is $21,000 per employee ($7,000 per quarter) (up from $5,000 for the entire year in 2020).
In order to be eligible to claim the ERTC (for 2020 or 2021), an employer must either:
- Have operations that were fully or partially suspended during any calendar 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
- Have experienced a “significant decline” in gross receipts during the calendar quarter. While the threshold necessary to trigger a significant decline in gross receipts was 50 percent in 2020, it was reduced to 20 percent for 2021.
Once the employer has established eligibility for the ERTC, the amount of the credit must be determined based on “qualified wages.” The definition of qualified wages eligible for the ERTC depends on the number of employees employed by the eligible employer. Generally, large employers can only count wages paid to employees not providing services because operations were suspended or due to an eligible decline in gross receipts. Conversely, smaller employers can count wages paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services. All affiliated entities are generally considered a single employer for purposes of ERTC eligibility.
The small employer threshold for 2020 was set at 100 employees. However, for the first three quarters of 2021, an eligible employer with 500 or fewer employees will qualify for the credit, even if employees are working.
Employers who received a Paycheck Protection Program (PPP) loan are also eligible to use the ERTC if the requirements for the ERTC are otherwise met. PPP borrowers may also be retroactively eligible for the tax credit (we expect more guidance from the IRS on claiming the credit retroactively). That said, wages for which the tax credit is claimed may not be counted for purposes of loan forgiveness under the PPP.
Despite the ERTC’s sunset before the end of the year, eligible employers may still claim the credit. The ERTC allows a direct credit against applicable employment taxes paid on qualified wages paid to eligible employees (generally as reported on payroll tax Form 941). The ERTC can be claimed on amended payroll tax returns (Form 941-X) as long as the applicable statute of limitations remains open. Despite the ability to claim the credit while the statute of limitations is open, the expansive nature of this credit and the recent retroactive sunset of the ERTC favors moving quickly to get the appropriate amended forms filed.