Knowledge Base
Our resident tax expert, Kevin Scott, CPA, offers helpful advice on the Employee Retention Tax Credit for you and your business.
Your small business could be leaving money on the table. The employee retention tax credit can provide a qualifying small business employer a payroll tax refund of up to$5,000 per employee for 2020 and up to $7,000 per employee per quarter for 2021. For example: A qualifying employer with 20 employees could receive up to $100,000 (20 employees x $10,000 qualifying wages x 50% tax credit) for tax year 2020 and up to $140,000 per quarter for 2021 (20 employees x $10,000 qualifying wages x 70% tax credit). That would be up to $560,000 for tax year 2021.
Employee Retention Tax Credit Extended to End of 2021 In the past 12 months, beginning in April 2020 with the enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Employee Retention Tax Credit (ERTC) provision has been impacted by two other laws. The Consolidated Appropriations Act 2021 and the American Rescue Plan Act have extended the deadline and expanded who is eligible to claim the credit.
CARES Act – 2020 For employers who qualify, including borrowers who took an initial PPP loan, the credit can be claimed against 50 percent of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13, 2020 and December 31, 2020.
Consolidated Appropriations Act – 2021 and American Rescue Plan Act -2021 These two acts allow employers who qualify, including PPP recipients, to claim a credit against 70 percent of qualified wages paid, up to $10,000 per employee per quarter.
Which Employers Qualify for the ERTC? Qualification is determined by one of two factors for eligible employers – and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
1. A trade or business that was fully or partially suspended or had to reduce business hours due a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter. Based on IRS guidance, some businesses generally do not meet this factor test and would not qualify.
– Those businesses that were considered essential, unless they have supply of critical material/goods disrupted in a manner that affects their ability to continue to operate.
– Businesses that were shuttered, but were able to continue their operations largely intact through telework. However, any of these businesses still may qualify for the credit with the second factor test.
2. An employer that has a significant decline in gross receipts.
What are qualifying wages? Qualifying wages are wages/compensation, in general, that are subject to FICA taxes, as well as qualified health expenses. Qualified health plan expenses are amounts paid or incurred by the eligible employer to provide and maintain a group health plan, but only to the extent those amounts are excluded from the gross income of employees by reason of IRS Code Section 106(a).