The Employee Retention Tax Credit (ERTC) has been an important component in helping business owners revitalize their businesses, while keeping critical employees employed. When used properly, ERTC can also act as an important tax-savings tool.

Read on to learn more about the ERTC and the major changes the federal government made to the program for 2021.

What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit was first approved in the CARES Act Congress passed in March 2020. ERTC acts as a fully qualified credit on wages employers pay to employees, on up to $10,000 in wages. Employers are not eligible, however, to receive both the credit and any Paycheck Protection Program (PPP) loan forgiveness on the same wage dollars.

Additionally, there are some differences to keep in mind depending on the tax year the credit is used.

ERTC for 2020

In 2020, the ERTC is limited to 50% on up to $10,000 in qualifying wages and healthcare costs paid to employees between March 13, 2020 and December 31, 2020. Qualifying wages and healthcare costs are limited to actual wages earned by employees; contractors are disallowed.

To qualify for the credit, employers will need to demonstrate a full or partial business suspension prompted by government action or a significant decline in the company’s gross receipts in 2020.

Unfortunately, the qualification for “significant decline” in gross receipts is somewhat complicated. Here’s a rundown on what qualifies

  • Firstly, employers must show a 50% or more drop in gross receipts in one 2020 quarter compared to the same period in 2019;
  • Each subsequent quarter thereafter must show a 20% or more decline in revenue compared to the same 2019 quarter.

ERTC for 2021

Luckily, the 2021 ERTC is a more lenient program with expanded availability to impacted employers.

The Economic Aid Act allows for the ERTC to be extended to June 30, 2021 and provides for employers to  receive a 70% credit of up to $7,000 per employee for each of the first two quarters of the year, translating to a possible credit of $14,000 per employee in 2021.

Again, in order to take advantage of the program, employers must demonstrate that their businesses had been fully or partially shut down by government mandate. Companies that were in operation but experienced a 20% or greater gross receipt decline in the first two 2021 quarters compared to their gross receipts in the same quarters in 2019 also qualify for the credit.

Getting the ERTC

Employers who qualify for the ERTC will be able to use the credit on their quarterly payroll tax filings. The law also allows for employers to amend their fourth quarter 2020 payroll tax filing if they determine retroactively that they qualified for the credit. The amendment can include the credit(s) employers should have received for every quarter in 2020.

As always, if you have any questions or would like to consult a Perlson professional about your tax planning and ERTC, be sure to contact us at 516-541-0022.

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