The Employee Retention Tax Credit (ERTC) originally was enacted as part of the CARES Act to encourage employers to hire and retain employees during the COVID-19 pandemic. The credit initially covered wages paid between March 12, 2020, and January 1, 2021, but Congress later extended the ERTC twice — most recently when the American Rescue Plan extended and modified the credit to apply to wages paid after July 1, 2021, and before January 1, 2022.

With the extensions, eligibility and the amount of the credit changed based on when the wages were paid. Whether an employer qualified as an “eligible employer” depends on the time period during which the wages were paid. For the period March 13, 2020, through December 31, 2020, an employer must have carried on a trade or business or was a tax-exempt organization partially or fully suspended due to COVID-19 orders from a 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). The 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 number of full-time employees an employer averaged in 2019 determines which employee wages can be claimed for the credit, depending on the year. For 2020, if an employer averaged more than 100 full-time employees, then only wages for those retained who are not working can be claimed. If a business employed 100 or fewer full-time employees, then wages for all employees can be claimed regardless of whether they are working. For 2021, the threshold is raised to 500 full-time employees.

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 toward health insurance, per full-time employee. But the credit became much richer in 2021: This year, 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.

As with any tax law, there are specific requirements that must be met to qualify. If you would like more information about this credit and how to qualify, contact Mark Patterson at (615) 346-2488 or mpatterson@kraftcpas.com.

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