Employee Retention Tax Credits
By Jonathan Porter, CPA
The Employee Retention Tax Credit (ERTC) has been a major topic for business owners and leaders since the outbreak of the COVID-19 pandemic in March 2020. Here we have broken down some of the changes that have occurred since its original passing, who is eligible, and how organizations can claim the credit.
What is the Employee Retention Tax Credit?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed in late March 2020 as a response to the economic fallout of the COVID-19 pandemic. In addition to many other programs, the Employee Retention Tax Credit (ERTC) was introduced to encourage businesses to continue paying employees.
While the first round of ERTC from the CARES Act concluded at the end of 2020, the Consolidated Appropriations Act (the Act) has since enhanced and extended the program. The Act made several amendments to the Employee Retention Tax Credits (ERTC) previously available under the CARES Act including an extension through December 31, 2021. The biggest change was it allowed businesses to participate in both the Payment Protection Program (PPP) and ERTC. They also split the ERTC into two different years (2020 and 2021) each of which has its own unique requirements.
Who is eligible?
Because the ERTC has been expanded to support more organizations, there are many questions on who is eligible and how eligibility is determined. An eligible employer must actively carry on a trade or business during the 2020 and/or 2021 calendar year and meet either of the following requirements
2020 ERTC
- Employers are required to have fully or partially suspended operations due to a COVID-19 related order (including not-for-profit employers) OR
- Have gross receipts 50% less than gross receipts in the same quarter in the prior calendar year (2019) or prior calendar quarter.
- Employers with 100 full-time employees (30 hours/wk) or under can claim all wages for ERTC. Employers with over 100 full-time employers can only claim the wages paid to employees to not work.
2021 ERTC
- Employers are required to have fully or partially suspended operations due to a COVID-19 related order (including not-for-profit employers) OR
- Have gross receipts 20% less than gross receipts in the same quarter in the reference calendar year (2019) or prior calendar quarter.
- Employers with 500 full-time employees (30 hours/wk) or under can claim all wages for ERTC. Employers with over 500 full-time employers can only claim the wages paid to employees to not work.
How is the ERTC calculated?
2020 ERTC
- You can receive a 50% credit for the first $10,000 of eligible wages paid to an employee for the year. Max credit per employee is $5,000
2021 ERTC
- You can receive a 70% credit for the first $10,000 of eligible wages paid to an employee per quarter. Max credit per employee who had eligible wages of $10,000 per quarter would be $28,000.
It is important to note that the ERTC is subject to income tax because the employer’s aggregate salary deductions are reduced by the amount of the credit.
How does my organization claim the ERTC?
To be able to the ERTC, eligible employers must report their total qualified wages on their quarterly employment tax returns (Form 941 for most employers). The credit is taken against the employer’s share of Social Security tax, but the excess is refundable under normal procedures.
In anticipation of receiving the ERTC, employers can retain a corresponding amount of the employment taxes that would have been deposited, without penalty. Eligible employers may also request an advance of the ERTC using IRS Form 7200. These advance payments are available to employers with less than 500 full-time employees with some limitations.
Need Assistance?
We understand that every situation is unique and requires an evaluation of your organization’s needs. MHCS has put together a team of specialized advisors for ERTC/PPP questions. Please contact Jonathan Porter (JPorter@MHCScpa.com) if you would like assistance to determine the most effective way to support your organization as it responds to the COVID-19 pandemic.
Jonathan Porter, CPA | Senior Manager
JPorter@MHCScpa.com