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Are you leaving tax relief on the table?

With tax season upon us, some companies may be surprised to learn that they are eligible for a significant form of relief included in 2020 and 2021 COVID-19 relief packages: the Employee Retention Tax Credit (ERTC). While the Paycheck Protection Program (PPP) got a lot of attention in the media as support for keeping employees on the payroll, ERTC – which can provide a payroll tax credit of up to $26,000 per employee – may have been overlooked by some businesses.

Background on ERTC

The ERTC was originally introduced in the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, but was overshadowed by the more robust (and publicized) PPP offerings. This makes sense because in the early days, companies had to choose between ERTC and PPP.

In December of 2020, the Consolidated Appropriations Act allowed all eligible employers to claim ERTC, even if they had already received a PPP loan. The one catch is that the ERTC cannot be claimed on wages that had been covered by a PPP loan. This meant that up to 50% of $10,000 in qualifying wages per employee could be claimed by many small businesses – possibly a $5,000 per employee boost for 2020.

 ERTC really kicked into high gear, though, with the American Rescue Plan, increasing the amount a company could claim (increased from 50% to 70%) and extending availability of the tax credit through 2021 (although that was since reduced to only the first three quarters of 2021). Now, instead of up to $5,000 per employee per year, the maximum tax credit shot up to $7,000 per quarter for each eligible employee. With little fanfare, here is a phenomenal opportunity to claim a fully refundable tax credit for up to $26,000 per employee since the pandemic began.

 HPBA is not able to provide tax advice, so we recommend you speak with your payroll processor, accountant, or tax professional to see whether you may qualify for some or all of this credit. We will list some additional resources at the end of this piece.

Who Can Claim the ERTC?

 In order to be eligible for ERTC, you must be a business that has been impacted by COVID-19 by either a “Government Order” or by “Reduced Gross Receipts.” These can be determined by:

  • A calendar quarter “in which the operation of the trade or business is fully or partially suspended during the calendar quarter due to an order from an appropriate government authority limiting commerce, travel or group meetings (for commercial, social, religious or other purposes) due to COVID-19.” This does not mean your business ever had to be completely shut down; even partially suspension of operation can qualify you for the tax credit.

 • A calendar quarter with a substantial decline in gross receipts. For 2020, this was defined as a 50% reduction from the same quarter in 2019. For 2021, the reduction relative to 2019 was changed to 20%.

 Other factors that may affect or limit eligibility include:
• The small business status of a company
• Sole proprietorship

• Wages of related individuals

 Again, a tax advisor will help you navigate most eligibility issues.

 What Wages are Eligible for the Credit?

 All wages and health insurance benefits paid in a qualifying time period (and not covered in a PPP loan or other relief offering) can count as eligible wages. For 2020, the covered period is from March 13th – December 31st. For 2021, the three eligible quarters are January 1st – March 31st, April 1st – June 30th, and July 1st – September 30th. Just because an employer qualifies in one year or one quarter does not mean they will automatically qualify in both years or all quarters.

How Do You Calculate the Tax Credit?

For 2020, the maximum credit is $5,000 per employee for the entire year. Qualifying wages of up to $10,000 are eligible for a 50% credit.

$10,000 x 50% = $5000 (per employee)

For 2021, the maximum credit is $7,000 per quarter per employee. Since the ERTC only ran through September 30, 2021, this means a maximum of up to $21,000 per employee for the year.

$10,000 x 70% = $7,000 (per employee per quarter)

Note: if an employee did not have $10,000 in qualifying wages per quarter, the claimable tax credit would be reduced accordingly.

How is the Tax Credit Claimed?

The credit can be claimed on Form 941. If you need to amend a claim for 2020 or for one or more quarters of 2021, you may use Form 941-X.

The IRS, National Federation of Independent Business, payroll processors, tax preparers, and other trade associations may all have additional resources for you to review as you determine eligibility and as you look to file a claim. If you have questions, please reach out to Ryan Carroll.