The Employee Retention Tax Credit (ERTC) was originally enacted as part of the CARES Act to encourage employers to hire and retain employees during the pandemic. The credit initially covered wages paid after March 12, 2020, and before January 1, 2021. Congress later extended the ERTC in the Consolidated Appropriations Act (CAA) to apply to wages paid before July 1, 2021. The American Rescue Plan Act (ARPA) extended and modified the credit to apply to wages paid after July 1, 2021, and before January 1, 2022.
With the new extensions, the credit was changed. Eligibility and the amount of the credit both changed based on when the wages were paid. Whether you qualify as an “eligible employer” depends on the period during which the wages were paid. For the period March 13, 2020, through December 31, 2020, you must have carried on a trade or business or were a tax-exempt organization that was partially or fully suspended due to COVID-19 orders from an appropriate governmental authority or experienced a significant decline in gross receipts (which is defined as a decrease in revenue of more than 50% from the same calendar quarter in 2019).
Those same qualifications apply for wages paid during 2021, except that the decrease in gross receipts had to be only greater than 20% of gross receipts for the same calendar quarter in 2019. The ARPA expanded the pool of eligible employers to include those that began operations after February 15, 2020, and have average annual gross receipts of less than or equal to $1 million. These employers can claim the credit without suspended operations or reduced receipts, up to $50,000 for the third and fourth quarter of 2021. It also directs extra relief to severely financially distressed employers – those with less than 10% of gross receipts for 2021 compared to the same calendar quarter in 2019 – regardless of the size of the employer.
The number of full-time employees an employer averaged in 2019 determines which employee wages can claim for the credit, depending on the year. For 2020, if you averaged more than 100 full-time employees, then only wages for those you retained who are not working can be claimed. If you employed 100 or fewer full-time employees, then you can claim wages for all employees, regardless of whether they’re working. For 2021 the threshold is raised to 500 full-time employees. Severely distressed employers may count as qualified wages any wages paid to an employee during any calendar quarter, regardless of their size.
The maximum amount of the credit changes based on when the wages were paid. For 2020, the maximum credit is equal to 50% of up to $10,000 of qualified wages, which includes the amount the employer pays towards health insurance, per full-time employee. For 2021, the maximum credit is 70% of up to $10,000 in qualifying wages, including the employer payment toward health insurance premiums, per full-time employee per quarter. So, the credit has become much richer beginning in 2021.
The ARPA prohibits “double-dipping” — so wages taken into account for several business tax credits, such as the research and development, empowerment zone, or work opportunity tax credits, can’t be used to claim the ERTC. Also, credits for COVID-related paid sick and family leave can’t also be taken into account for purposes of the ERTC. In addition, recipients of a Shuttered Venue Operator Grant or a Restaurant Revitalization Fund Grant may not treat any amounts reported or otherwise taken into account as payroll costs for those programs as qualified wages for ERTC purposes.
As with any good tax law, there are requirements that must be met to qualify, and as the saying goes, the devil is in the details. For more information about the credit and how it could affect you, reach out to a member of our tax services team.