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Employee Retention Tax Credit – Do You Have Money to Claim?
One significant tax break through recent COVID relief legislation is the Employee Retention Tax Credit. Does your company qualify?
A whirlwind of legislation has been passed since the COVID-19 pandemic started in March of 2020, including the CARES Act that triggered the Employee Retention Tax Credit (ERTC). After subsequent legislation from the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA), your company may be able to claim money for employees that have been on payroll, even if you received a Paycheck Protection Program (PPP) loan.
How much could I potentially claim in Employee Retention Tax Credits?
For wages paid in 2020, you may be able to retroactively claim up to $5,000 per employee for 2020. This is calculated at 50% of wages paid after March 12, 2020 thru December 31, 2020 (including allocable qualified health plan expenses), capped at $5,000 for the year.
Stratus.hr Clients: claiming this retroactive 2020 tax credit will require Stratus.hr to file an amended 2020 tax return. Please contact your Stratus.hr Representative ASAP for details.
Credits for 2021 are significantly more generous for employers. Per the CAA, employers may claim up to 70% of $10,000 in wages and allocable qualified health plan expenses per employee per quarter. That equates to $7,000 per employee per quarter (capped at $14,000 for the first two quarters of 2021), or 70% of employees’ wages for those earning less than $10,000 per quarter.
(While the IRS recently released guidance on claiming employee retention tax credits through June 30, 2021, we are still awaiting further guidance for adherence to the ARPA, which extends employee retention tax credits through Q3 and Q4 of 2021.)
Do you have money you can claim through the Employee Retention Tax Credit?
How do I know if I’m eligible to claim retroactive employee retention credits for 2020?
To retroactively claim the employee retention credits for 2020, an eligible employer is any trade or business that:
- Had operations fully or partially suspended under government orders due to COVID-19; or
- Had a decline of at least 50% in gross receipts as compared to the same calendar quarter in 2019. (Note: you would remain eligible for subsequent quarters unless 2020 gross receipts rebounded in a later quarter to 80% or more of the same 2019 quarter. If your company rebounded, then it would not be eligible for the subsequent quarter.)
Any 501(c) tax-exempt organization is eligible if either test is met. Self-employed organizations (partners, sole proprietors, Sub S owners) can claim credit on wages to employees, but not with respect to self-employment income.
Employers must qualify on a quarter-by-quarter basis to claim 2020 employee retention credits and maintain documentation to support their eligibility, per the IRS guidance.
Does my company size matter for claiming retroactive 2020 employee retention credits?
Yes, company size does matter. To retroactively claim the employee retention credits for 2020:
- Employers with an average of 100 or fewer full-time employees in 2019 may be eligible for any wages (and qualified health plan expenses) to employees during a government ordered suspension or in the quarter with eligible reduced receipts.
- Companies with more than 100 full-time employees in 2019 may only be eligible for wages paid to employees not performing services during the government ordered suspension or in the quarter with eligible reduced receipts.
How do I know if I’m an eligible employer to claim employee retention credits for Q1 and/or Q2 of 2021?
The rules for claiming employee retention credits in 2021 are similar to 2020, except that:
- Businesses only need to have a decline in gross receipts of more than 20% as compared to the same calendar quarter in 2019. (50% for 2020; 20% for 2021)
- Employers may choose to compare their gross receipts with the same quarter in 2019 or by comparing with the immediately preceding calendar quarter with the same quarter of 2019. For example, an employer who had at least a 20% decline in gross receipts in Q4 of 2020 compared to Q4 in 2019 may determine they already qualify for the employee retention credits in Q1 of 2021.
Again, employers must qualify on a quarter-by-quarter basis to claim 2021 employee retention credits and maintain documentation to support their eligibility, per the IRS guidance.
Does my company size matter for claiming 2021 employee retention credits?
Yes, company size still matters – but headcount increased per the ARPA.
- Employers with fewer than an average of 500 full-time employees in 2019 may be eligible to claim employee retention credits for any wages (and qualified health plan expenses) paid to employees in 2021 during a government ordered suspension or in the quarter with eligible reduced receipts.
- Companies with more than 500 employees may only be eligible for wages paid to employees not performing services in 2021 during a government ordered suspension or in the quarter with eligible reduced receipts.
How can my company receive both a PPP loan and employee retention credits?
While the CARES Act originally forced employers to choose between the PPP loan or the Employee Retention Credit, the CAA overturned that requirement. Now it’s possible your company could receive a PPP loan and also qualify for the employee retention credit, so long as salaries used for the latter are not included towards the PPP loan forgiveness.
This particular change is repealed retroactively, meaning you may be able to go back and receive the ERTC for wages paid in 2020 that weren’t already taken into account in your PPP loan forgiveness.
Here are several examples of companies who may have received a PPP loan and still qualify for the ERTC:
- If your company recently acquired another business that received a PPP loan, you may still be eligible to claim the employee retention credit for any qualified wages for the original company that weren’t claimed with the PPP loan. (Remember, you cannot claim wages for the ERTC if they were already counted toward the PPP loan forgiveness.)
- If your PPP loan is ultimately not forgiven, you may be eligible to claim the ERTC.
- If your company had payroll costs that exceeded the 60% requirement for PPP loan forgiveness, you may be able to claim wages paid beyond the 60% as eligible wages under the ERTC.
As a general rule, if you’re counting employee wages to justify forgiveness for a PPP loan, you’ll be better off allocating those wages to the PPP loan (paid at 100%) versus employee retention credits (paid at 50% up to $5,000 in 2020, and 70% up to $7,000 per quarter in 2021).
Tip: consider getting your PPP loan forgiven first and then seeing how much of the ERTC remains to be claimed after calculating items other than wages (rent, mortgage, overhead expenses, etc.). If you’re a Stratus.hr client, be sure you claim tax credits within the date ranges emailed to you to avoid incurring an amended tax return fee.
Can I claim employee retention credits for employees who also receive paid sick and/or family and medical leave?
No, you cannot double dip. If you claim credits for paid sick and/or family and medical leave, you cannot claim credits for the same wages as employee retention credits – similar to a PPP loan.
What if my company didn’t exist for all of 2019?
Check the IRS guidance to determine alternative methods of eligibility for claiming the ERTC.
For more information, please see the video below or contact your Stratus.hr HR Representative.
Please note: the above video only covers the ERTC through the passing of the CAA. The ARPA has extended the ERTC through December 31, 2021; however, as of the date of this article, the IRS has not yet published guidance for Q3 and Q4 of 2021.