Employee Retention Tax Credit – More Covid Relief Benefits
An Opportunity to Supercharge your Government Relief Benefits
Claiming the Employee Retention Tax Credit on top of your PPP Loan
The CARES Act signed into law in March 2020 provided businesses with two principal relief opportunities: (i) loans under the Payroll Protection Program (“PPP”) and (ii) Employee Retention Tax Credits (“ERTC”). The Act provided that a business that receives a PPP loan is prohibited from also claiming the ERTC.
The Consolidated Appropriations Act that passed at the end of 2020 changed the law so as to significantly expand relief opportunities for businesses by allowing a company that received a PPP loan to also claim the ERTC. This change could result in substantially more government relief for those businesses adversely impacted by the economic effects of COVID-19 shutdowns.
Rules for 2020
For 2020, a business that received a PPP loan can now retroactively claim an ERTC for 2020 provided (i) the PPP loan was not used to pay qualified wages to employees for purposes of the ERTC (e.g., up to $10,000 per employee for the year) – this rule is to prevent double dipping and (ii) the business is eligible for the ERTC.
A business is eligible for the ERTC in 2020 if either (i) it was fully or partially suspended from operating during at least one quarter of 2020, or (ii) it experienced a 50% decline in gross receipts for a quarter in 2020 compared to the same quarter in 2019. Eligibility for the credit begins on the first day of the first calendar quarter where such a suspension or decline in receipts occurs and continues until the first day of the first calendar quarter in which gross receipts are more than 80% of the comparable 2019 quarter.
The ERTC for 2020 is equal to 50% of qualified wages (plus certain health care costs) paid during eligible quarters, with qualified wages capped at $10,000 per employee per year. For businesses with 100 or fewer full-time employees, all wages paid during an eligible quarter are considered qualified wages. If a business has more than 100 full-time employees, qualified wages only count for those paid to employees that are not providing services to the business because of either business suspension or the decline in gross receipts.
This means that the maximum ERTC that can be claimed in 2020 is $5,000 per employee. For a business with 100 employees, this could mean a tax credit of up to $500,000 for 2020 – a significant amount of additional relief over and above any PPP funds received.
Rules for 2021
For 2021, the ERTC is even more lucrative.
The ERTC is extended through July 1, 2021 and applies to those businesses that have either (i) fully or partially suspended operations, or (ii) experienced a 20% decline in gross receipts for the first or second quarter of 2021 compared to the same quarter in 2019. Note the change reduces the eligible revenue decline from 50% to only 20%.
Further, the credit is increased to 70% of qualified wages (compared to 50% in 2020) paid during an eligible quarter, with qualified wages capped at $10,000 per employee per quarter (rather than per year). In addition, the full-time employee limit is raised from 100 to 500 full-time employees, making significantly more businesses eligible for the full credit.
The effect of these changes is to increase the maximum ERTC that can be claimed in 2021 to $14,000 per employee. For our 100-employee sample business this could mean an additional tax credit of $1.4 million.
Impact of other credit and relief provisions
Wages counted for the ERTC cannot include wages for which an employer; (i) receives a tax credit for sick and family leave under the Families First Coronavirus Response Act, (ii) receives a credit for paid family and medical leave under IRC Sec. 45S, or (iii) receives a Work Opportunity Tax Credit under IRC Sec 51 for an employee.
The ERTC is not taxable income for federal income tax purposes, but the amount of the ERTC claimed reduces deductible wage expense.
Claiming the ERTC
The ERTC is claimed on the quarterly Form 941 payroll tax return. The credit is taken against the employer’s share of social security tax with the excess refunded to the business.
A business can either (i) claim the credit at the end of the quarter (once the reduction in gross receipts is known) and request a refund of the ERTC on its quarterly Form 941, (ii) in anticipation of claiming the credit, reduce its payroll tax deposits for federal income tax withholding, social security and medicare taxes during the quarter (without penalty), or (iii) request an advance of the ERTC by filing Form 7200.
Considerations
Each business has its own unique circumstances.
While the same wages (the $10K max per year/quarter) cannot be counted for both ERTC and PPP loan forgiveness purposes, it is possible for some businesses to qualify for and maximize both its PPP loans and the ERTC (e.g., wages are sufficient to cover both). Others may find that depending on its payroll and expense structure that a larger ERTC is available and may forgo either full PPP loan forgiveness or reduce its second round PPP loan request.
Given the significant dollars at stake, company management should consider modeling its ERTC and PPP benefits to maximize the benefits of both relief opportunities.
Last modified: February 19, 2021