What is ERTC or ERC?
The Employee Retention Tax Credit (also known as ERC or ERTC) is a refundable tax credit against certain employment taxes.
What has changed?
The newly extended employee retention tax credit (ERC or ERTC) is designed to make it easier for small businesses. This program allows employers, who have kept their employees on the payroll despite the hardships of the COVID-19 pandemic, to claim a tax credit for up to 50-70%. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended Employee Retention Credit (ERC) to June 30, 2021. Some of the changes apply only to 2021, but other changes apply to both 2020 and 2021.
Now eligible employers can claim a refundable tax credit against the employer share of Social Security tax equal to 70% of the qualified wages they pay to employees between December 31, 2020, and June 30, 2021.
For each calendar quarter in 2021, the qualified wages are limited to $10,000 per employee. Therefore, the maximum ERC is $7,000 per employee per calendar quarter OR a total of $14,000 in 2021.
How to qualify for ERTC advance payment of credit?
Businesses can access the ERC or ERTC for the 1st and 2nd quarters of 2021 before filing their employment tax returns. They can do this by reducing employment tax deposits to the IRS. Employers with an average of less than 500 full-time employees in 2019 may request advance payment of the credit. They can do so using Form 7200, Advance of Employer Credits Due to Covid-19, after reducing deposits. Though there are a few exceptions to qualifying for this advance. Advances are not available for larger employers in 2021.
Effective January 1, 2021, employers are eligible if they conducted business January 1, 2021, through June 30, 2021, AND:
- Had a full or partial suspension of the operation of their business between 01/01/2021 and 06/30/2021 due to governmental regulations limiting travel, commerce, or meetings/gatherings due to the COVID-19 pandemic, OR
- Experienced a decline in revenues (gross receipts) in a calendar quarter in 2021 where the gross receipts of that calendar quarter are less than 80% of the gross receipts in the same calendar quarter in 2019 ( the gross receipts are required to be less than 50% to qualify under this prong).
For businesses that did not exist in 2019, they may use the corresponding quarter in 2020 to measure the decline in gross receipts. Additionally, for the first and second calendar quarters in 2021, businesses may elect to measure the decline in their gross receipts using the preceding calendar quarter compared to the same calendar quarter in 2019 (For example, the fourth calendar quarter of 2020 and the first calendar quarter of 2021).
How to calculate qualified wages?
Lastly, effective January 1, 2021, the definition of qualified wages changed to provide:
- For an employer that averaged 500 or fewer full-time employees in 2019, qualified wages are generally those wages paid to all employees during a period that operations were fully or partially suspended or during the quarter that the employer had a decline in gross receipts regardless of whether the employees are providing services.*
- For an employer that averaged more than 500 full-time employees in 2019, qualified wages are generally those wages paid to employees that are not providing services because operations were fully or partially suspended or due to the decline in gross receipts.*
How do ERTC and PPP now work together?
Perhaps most importantly the law now allows employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages that were not treated as payroll/ payroll costs in the PPP forgiveness calculation.