In the wake of the pandemic, businesses worldwide have faced unprecedented challenges. To help alleviate some financial burdens and support employee retention, the United States government instituted the Employee Retention Tax Credit (ERTC). Understanding the eligibility criteria for this beneficial credit can aid businesses in navigating these difficult times.

What is the Employee Retention Tax Credit?

The ERTC is a refundable tax credit designed to encourage businesses to retain employees during times of economic hardship. It was first introduced under the CARES Act in 2020 and later expanded by the Consolidated Appropriations Act, 2021 and the American Rescue Plan Act, 2021. The credit allows eligible employers to claim a percentage of wages paid to retained employees during specific periods of reduced business operations or full/partial suspension due to government orders.

Eligibility Criteria for Employee Retention Tax Credit

To qualify for the ERTC, employers must meet specific requirements depending on the calendar quarter during which they claim the credit. The eligibility criteria differ for 2020 and 2021.

Eligibility Criteria for 2020

For the calendar quarters in 2020, an employer is eligible for the ERTC if:

  • Their business operations were fully or partially suspended due to a COVID-19-related governmental order, or
  • Their gross receipts for any calendar quarter of 2020 were less than 50% of their gross receipts for the same quarter in 2019.

Employers who received a Paycheck Protection Program (PPP) loan were initially ineligible for the ERTC. However, this restriction was lifted by the Taxpayer Certainty and Disaster Tax Relief Act of 2020.

Eligibility Criteria for 2021

For the calendar quarters in 2021, an employer is eligible for the ERTC if:

  • Their business operations were fully or partially suspended due to a COVID-19-related governmental order, or
  • Their gross receipts for any calendar quarter of 2021 were less than 80% of their gross receipts for the same quarter in 2019.

In addition, employers who started their business after February 15, 2019, can choose to compare their gross receipts to the corresponding 2020 calendar quarter instead.

Calculating the Employee Retention Tax Credit

The amount of the ERTC varies depending on the year and the number of employees.

Calculating the ERTC for 2020

For 2020, the credit is equal to 50% of qualified wages, up to a maximum of $10,000 per employee for the entire year. This results in a maximum ERTC of $5,000 per employee for 2020.

Qualified wages include:

  • Wages paid to retained employees during periods of full/partial suspension due to government orders, or
  • Wages paid to retained employees during periods when the employer experienced significant declines in gross receipts as explained above.

If an employer had more than 100 full-time employees in 2019, only wages paid to employees not providing services due to COVID-19 are considered eligible for the credit. For employers with 100 or fewer full-time employees in 2019, all wages paid to retained employees during eligible periods are considered qualified wages.

Calculating the ERTC for 2021

For 2021, the credit is equal to 70% of qualified wages, up to a maximum of $10,000 per employee per calendar quarter. This results in a maximum ERTC of $28,000 per employee for 2021.

Qualified wages include:

  • Wages paid to retained employees during periods of full/partial suspension due to government orders, or
  • Wages paid to retained employees during periods when the employer experienced declines in gross receipts as explained above.

If an employer had more than 500 full-time employees in 2019, only wages paid to employees not providing services due to COVID-19 are considered eligible for the credit. For employers with 500 or fewer full-time employees in 2019, all wages paid to retained employees during eligible periods are considered qualified wages.

Claiming the Employee Retention Tax Credit

Eligible employers can claim the ERTC on their quarterly employment tax return (Form 941) by reporting total qualified wages and health insurance costs for the quarter. Employers can also request an advance payment of the credit by submitting Form 7200 if their anticipated credit amounts exceed their federal employment tax deposits.

The IRS provides detailed guidance on calculating and claiming the ERTC in Notice 2021-20 and Notice 2021-23. Employers should consult these resources and seek professional advice to ensure they accurately determine their eligibility and credit amounts.

Impact of Employee Retention Tax Credit on Businesses

By understanding and taking advantage of the ERTC, businesses can potentially save thousands of dollars per employee, helping them weather the economic storm brought on by the pandemic. Employers should closely examine their eligibility for the credit and take necessary steps to claim it in order to support their financial stability and sustain their workforce during these challenging times.