The original CARES Act included the Earned Retention Tax Credit (ERTC) for businesses that were not eligible for the Paycheck Protection Program (PPP). The new stimulus package now allows businesses to utilize both the PPP and the ERTC and this is retroactive to March 2020 through the first half of 2021.
Below are the details.
Qualification for ERTC for 2020 Tax Year
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2020 and experience either:
- The full or partial suspension of the operations of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- A 50% decline in gross receipts for any quarter in 2020 as compared to the same quarter in 2019
Qualification for ERTC for 2021 Tax Year
Employers, including tax-exempt organizations, are eligible for the credit if they operate a trade or business during calendar year 2021 and experience either:
- The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
- A 20% decline in gross receipts for either quarter within the first half of 2021 as compared to the same quarter in 2019
- If the business was started in 2020 then 2020 will be the comparison period
- You may elect to use the prior quarter to determine if you are eligible for the current year (e.g., for 2021 Q1, you may use 2020 Q4 vs. 2019 Q4 as a comparison if more beneficial)
Qualification Amount
The amount of the ERTC is based upon qualified wages and you can not include the same wages in the ERTC calculation that you include in your PPP forgiveness application. Wages should always be applied to PPP forgiveness first, and to the extent there are excess wages not needed for PPP forgiveness, the remaining can be applied to the ERTC. Below is a brief summary of the calculation, which is different for 2020 and 2021:
2020 ERTC Calculation:
- 50% of qualified wages, capped at a $5,000 credit per employee for 2020.
- If the business averaged 100 or less employees in 2019, qualified wages includes wages paid to any employee during the period operations were suspended or the period of the decline in gross receipts.
- If the business averaged more than 100 employees in 2019, qualified wages only includes amounts paid to employees who were not actually working during the period operations were suspended or the period of the decline in gross receipts.
2021 ERTC Calculation
- 70% of qualified wages, capped at a $7,000 credit per employee per quarter. Note the change for 2020 was capped per employee for the entire year and 2021 is per employee per quarter.
- If the business averaged 500 or less employees in 2019, qualified wages includes wages paid to any employee during the period operations were suspended or the period of the decline in gross receipts.
- If the business averaged more than 500 employees in 2019, qualified wages only includes amounts paid to employees who are not actually working during the period operations were suspended or the period of the decline in gross receipts.
Applying for the ERTC
The ERTC is a credit that is taken on Form 941 against payroll taxes that must be remitted. It appears that the entire 2020 ERTC can be claimed on the Q4 941 rather than having to amend previous quarters. To the extent that the ERTC exceeds payroll taxes due, a Form 7200 can be filed to receive a refund for the excess. Additionally, for 2021, there is an option to receive an advance payment of your estimated ERTC for the entire first half of 2021. Companies should partner with their payroll service providers when claiming these credits on their Form 941.
We strongly suggest that qualifying companies partner with their payroll provider when assessing, calculating, and applying for ERTC’s.
The information presented here should not be construed as legal, tax, accounting, or valuation advice. No one should act on such information without appropriate professional advice and after a thorough examination of the particular situation.
