Employee Retention Tax Credit, What You Need to Know

Rose Report: Issue 60

By Tim Fargo, COO and CFO, Rose Financial Solutions

As a means of boosting the economy during the onset of COVID-19, the Coronavirus Aid, Relief, and Economic Security Act (CARES) was enacted into law in March 2020. To incentivize companies to keep employees on the payroll, the CARES Act offered businesses an Employee Retention Tax Credit (ERTC) that allowed employers who met specific criteria to claim a credit against payroll taxes and have it partially refundable. The ERTC provisions of the CARES Act were expanded and extended by the 2021 Consolidated Appropriations Act (CAA), signed into law in December 2020. Companies may be eligible for an ERTC if their businesses have been substantially impacted by a drop in revenue, a shutdown order, or changes in business systems, processes, and structures that need to be substantiated.

Although the ERTC advance portion of the program has officially expired as an advance credit, eligible businesses can file amended returns to claim the tax credit retroactively for up to three years after filing their 941 tax form. An outline of the ERTC under the CARES Act and CAA is below to help determine if you retroactively qualify for the tax credit.

2020 CARES Act
Under the CARES Act, the ERTC is available for the second, third, and fourth quarters beginning March 12, 2020. To qualify for the credit, an employer’s gross receipts must have declined by 50% over the same quarter in 2019. For example, a company with $10,000 in qualifying wages could get a 50% credit, equating to $5,000 in credit. For 2020, the maximum credit is $5,000 per employee for the entire year, which applies to businesses with 100 or fewer employees, with some exceptions.

2021 CAA
In 2021, the ERTC is available for the first, second, and third quarters. The CAA significantly expanded the ERTC to include several revisions, including reducing the gross receipts down from a 50% reduction to just 20% and increasing the available credit to $7,000 per quarter. For example, if you had $10,000 in applicable wages, you may receive a 70% credit for the first, second, and third quarters of 2021, for a total of $21,000 in credit. Additionally, with a few exceptions, the ERTC was expanded to enable businesses with 500 or fewer employees to qualify.

Remember that if you received a Paycheck Protection Program (PPP) loan, you could not use the same wages for ERTC that you used for the PPP loan. However, it is possible to qualify for an ERTC even if your company received PPP assistance or loan forgiveness, provided the ERTC salary was not funded by PPP funding. Additionally, you need to ensure you have specific, well-documented support in terms of shutdown orders and any change of business processes that impacted your company.

The end of the year is rapidly approaching. Make sure to contact your tax accountant regarding your eligibility for ERTC as soon as possible. The content in this article is for information purposes only. It should not be considered legal, accounting, or tax advice or a substitute for obtaining such advice specific to your business.

For 25+ years, RFS has been delivering proactive tax solutions that manage risk and maintain compliance. Our team is comprised of experienced certified public accountants and tax professionals that stay up to date on current and future tax regulations and tax strategies at the state and local levels. Please schedule an introductory call to learn more about our proactive tax services.

Please read the Rose Report article, It’s Not Too Late to Mitigate Your 2022 Tax Bill , for additional tax information.