Employee Retention Tax Credit
The federal government recently expanded the Employee Retention Tax Credit for Q1 and Q2 of 2021, with up to $14,000 available per employee, besides other credits.
Businesses that received a PPP loan are now eligible to claim the credit as well. The credit cannot be claimed for any wages paid for with funds from a PPP loan.
What is the Employee Retention Tax Credit?
–The ERTC is a refundable, advanceable tax credit available for wages paid by employers who experienced a significant quarterly revenue decline or had business operations affected by a government lockdown.
– The significant quarterly revenue decline requirement for 2020 is 50% and for 2021 is 20%.
– The credit is 50% of qualified wages in 2020 and 70% in 2021.
– The credit is capped at $5000 per employee for all of 2020 and $14000 per employee for the first two quarters of 2021.
– Employers claim the ERTC by withholding payroll taxes for the number of qualified employee wages. Because the tax credit is refundable, if your withholdings do not cover the entire tax credit, the IRS will send you a check for the remaining amount
Eligible Employers– Employers of any size may claim the credit for qualified wages paid from 3/12/2020 – 12/31/2020 (2020 credit) and 1/1/2021 – 6/30/2021 (2021 credit).
– Small employers may claim all wages paid to employees during the time of a lockdown or during a quarter of significant revenue reduction.
– Large employers may only claim wages paid to employees who were not providing services during the time of a lockdown or during a quarter of significant revenue reduction.
– For 2020, small employers have less than 100 full time equivalent employees (FTE) and large employers have over 100 FTE.
– For 2021, small employers are defined as having less than 500 FTE and large employers have over 500 FTE.
Frequently Asked Questions
We are waiting for the IRS to clarify next steps, but we anticipate the IRS will likely use Form 7200, Advance of Employer Credits Due to COVID-19, the same ERTC form used in 2020. It is important to note that the December 2020 recovery bill extended the ERTC through June 30, 2021, so this credit applies to 2021 wages in Q1 and Q2.
Qualified wages include salaries, commissions, tips, or similar compensation that are subject to FICA tax. Does not include compensation paid in cash. Wages paid to related individuals are not eligible for the Employee Retention Credit.
Yes. The December 2020 recovery law allows first-draw PPP loan recipients to go back and claim the ERTC on 2020 wages. However, please note the ERTC credit for 2020 wages is limited to 50% of the first $10,000 in qualified wages per employee in a quarter. The maximum credit per employee for 2020 is $5,000. The more generous credit outlined above is for Q1 and Q2 in 2021.
Yes. The December 2020 recovery bill allows PPP loan recipients to access the ERTC and vice versa. The previous prohibition on using both programs has been removed. However, businesses cannot claim the ERTC on wages paid for by the PPP loan.