ERTC Eligibility How to Qualify Employee Retention Tax Credit PPP Loan
Overview of ERTC
The Employee Retention Tax Credit (ERTC) is a federal tax credit created by the Coronavirus Aid, Relief and Economic Security (CARES) Act. The ERTC is designed to help businesses affected by the pandemic keep their workforce employed. The credit applies to businesses of any size and is based on wages paid to employees.
This section will provide an overview of the ERTC qualifications and how to claim the credit:
What is the Employee Retention Tax Credit?
The Employee Retention Tax Credit (ERTC) is a tax benefit enacted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to help employers retain their workforce throughout the pandemic. The ERTC is available to employers of all sizes if they experience a significant decline in gross revenues or are forced to fully or partially suspend operations due to circumstances related to the COVID-19 pandemic.
Employers who qualify for the credit can claim it against certain employment taxes equal to 50% of qualified wages paid after March 12, 2020, up to $5,000 per employee. This credit is available through June 30, 2021.
Additionally, employers that received a Paycheck Protection Program (PPP) loan during the coverage period may be eligible for the ERTC for certain wages not covered by forgiven PPP loan proceeds so long as other eligibility requirements are met and applicable Internal Revenue Service (IRS) guidance is followed. In coordination with further guidance from Congress and Treasury/IRS direction, employers should review this information carefully in order determine if they qualify for this credit.
Who is eligible for the ERTC?
The Employee Retention Tax Credit (ERTC) is available to businesses that have been significantly impacted by the COVID-19 pandemic and is designed to help provide a financial incentive for them to keep or rehire employees. The credit can cover up to 50% of certain eligible wages paid after March 12, 2020, and before January 1, 2021.
To be eligible for the Employee Retention Tax Credit, your business must meet the following criteria:
- Your business’s operations must have been fully or partially suspended due to a lockdown order from a governmental authority limiting commerce, travel, or group meetings as a result of COVID-19
- You experienced at least a 50% reduction in gross receipts in any quarter of 2020 compared to the same quarter in 2019
- The business must not have already received tax credits through other government funded programs such as the Paycheck Protection Program (PPP) Loan Program.
Understanding the criteria for Employee Retention Tax Credit (ERTC) eligibility and the potential implications on forgivable Paycheck Protection Program (PPP) Loans is key for many businesses. The qualifying criteria for the program is complex and is determined by various factors.
In this article, we will explore the different eligibility requirements for ERTC and how it relates to PPP Loan forgiveness:
To qualify for the ERTC, employers must pay wages to their employees during either the first or second quarters of 2020 that meet one of the following criteria:
- Pay wages for periods when an employee was not providing services due to circumstances related to COVID-19 and the employer maintained a continuing relationship with the employee.
- Pay wages that are eligible in Section 3111(q) of the Internal Revenue Code, which means wages paid under a required by a COVID-19 related emergency relief state or local law.
- Pay wages reported on Form 941 (Employer’s quarterly federal tax return) filed with the IRS that are determined to be qualified wages.
Wages may be considered qualified wages if they satisfy either of two tests:
- The Wages Test Formula: Qualified wages are limited to 50% of what they normally were during 2019 taking into account FICA taxes and health benefits paid by employers.
- The Reference Period Test: Businesses who have an increase in gross receipts in any calendar quarter compared to same quarter in 2019, eligible for qualified wage equal to lessor amount of:
- 50% of what it was during Q2019
- Total wages paid from March 13, 2020 – Dec 31 ,2020 minus total amounts paid from 1/1/20 – 3/12/2020
Qualifying full-time equivalent employees
Qualifying for the Employee Retention Tax Credit (ERTC) requires that an eligible employer maintain its workforce during a period of economic hardship. An employer is considered to have maintained its workforce if it has an average number of full-time equivalent employees that is at least 50% of the average number of full-time employees employed by the employer in 2019 or, alternatively, the employer’s 2020 total wages paid to its full-time equivalent employees are greater than or equal to 70% of the total wages paid by such employer in 2019.
Full-Time Equivalent Employees (FTEs). For purposes of ERTC eligibility, an FTE is defined as an employee who works a minimum of 30 hours per week or 130 hours per month in 2019. The determination of FTEs must be allocated on a monthly basis and takes into consideration both part-time and seasonal employees who worked for you during 2019. Therefore, for each month during the calendar year 2019, employers must add together:
- Number of Full Time Employees (employees who worked an average for at least 30 hours/week); plus
- The number obtained by dividing Total Hours Worked by all non-full time employees divided by 120.
For example, if your business employed 2 full time (at least 30 hours/week) and 4 part time (25 hours/week). For one particular month there were total 2000 hours worked then you would calculate as: 2 FTE + ((2000 / 25) / 120 ) = 4 FTEs
Qualifying business operations
In order to qualify for the Employee Retention Tax Credit and other associated relief, there are specific criteria that businesses must meet and evidence they must provide. Businesses eligible for the ERTC must have been operating in 2020 and 2020, either fully or partially suspended by government order due to COVID-19 related reasons, or seen a significant decline in gross receipts.
In order to qualify as a business operation with fully or partially suspended operations due to COVID-19, businesses must provide evidence that they were forced to suspend the majority of their operations in 2020 or 2021 due to a direct result of orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to the virus. Restaurants and hotels may be able to qualify even if their operations are not completely shut down but instead limited by local ordinances.
To qualify as an eligible business with a significant decline in gross receipts, employers must demonstrate a year-over-year decrease in gross receipts of 20% during any quarter compared with the same quarter in 2019 (or 50% decrease compared with 2019 for businesses who began operations in 2020). Special rules apply for organizations that receive grants from certain small business loans (generally PPP loans) issued before January 1st, 2021; these businesses cannot use these funds as part of calculations for their annual gross receipts.
PPP Loan and ERTC
With 2020 being a difficult year for businesses due to the pandemic, many businesses have been looking for financial help, such as the Paycheck Protection Program (PPP) and the Employee Retention Tax Credit (ERTC). These two government programs are designed to help businesses stay afloat and keep their employees employed during these tough times.
In this article, we will discuss the qualifications needed to qualify for a PPP loan and ERTC and how they can help businesses during the pandemic:
How do PPP loans affect ERTC eligibility?
Paycheck Protection Program (PPP) loans can have an effect on your eligibility for the Employee Retention Tax Credit (ERTC). The key factors determining eligibility are the amount of money spent on payroll expenses for certain employees and whether or not your business was impacted by Covid-19.
PPP loans use revenues from payroll expenses to calculate loan amounts. Eligibility for ERTC is determined by revenues from wages, so this could potentially reduce the opportunities you may have to apply for ERTC if you have a PPP loan.
Specifically, any wages from an entity receiving a PPP loan are excluded when calculating eligible wages for ERTC and thus, any wages paid with those funds will be ineligible for ERTC credits. Additionally, employers who receive a PPP loan and use them to pay salaries will not be eligible to opt in to the annualized rule during their 2020 tax year.
Although PPP loans can affect your eligibility for the ERTC program, other factors determine if you are still able to qualify. To assess potential eligibility, it’s important to consider both sources of income over a given period – payroll expenses and revenue – when calculating employee retention credit claims. Additionally, businesses should speak with an accountant or other financial professional before deciding how best to approach understanding potential impacts of receiving a PPP Loan on ERTC eligibility.
How to claim ERTC if you received a PPP loan
If you have already received a Paycheck Protection Program (PPP) loan, you can still qualify for Employee Retention Tax Credit (ERTC). The provision enabling ERTC eligibility for businesses with PPP loans was included in the Consolidated Appropriations Act of 2021, which provides updated benefits for businesses.
To determine eligibility and limit the total amount of assistance available to employers, the legislation requires that employers must subtract their 2020 Employee Retention Tax Credits from their 2021 Paycheck Protection Program loan forgiveness deductions on their tax returns. This will ensure companies are not double dipping when claiming both tax credits.
In addition to the subtraction requirement, any business receiving a PPP loan under either the original CARES Act or the latest COVID-relief measures have to reduce their current employee count from 2019 by 20 percent in order to be eligible for ERTC – unless they experienced revenue declines of at least 20 percent in any quarter of 2020 compared to similar periods in 2019.
To claim ERTC if you received a PPP loan, you must include Form 941 with your quarterly returns each quarter when you claim ERTC and subtract any corresponding credit amount from your PPP loan forgiveness deduction. If it’s discovered later that an employer has claimed both benefits without appropriately subtracting one from the other, they may be subject to penalties or fines imposed by the IRS.
For detailed information it’s important to consult an accredited financial adviser or tax professional versed in ERTC or PPP regulations so requirements are correctly fulfilled each quarter and after applying for forgiveness of a PPP loan.
The Employee Retention Tax Credit (ERTC) was established by the CARES Act to help businesses struggling during the Covid-19 pandemic. It is a tax credit for employers who retain their employees and cover certain costs such as wages and health insurance premiums.
In order to qualify for the ERTC, employers must calculate their eligibility. This section will discuss the steps necessary to calculate ERTC:
Calculating the tax credit amount
Employers qualify for an Employee Retention Tax Credit (ERTC) if they have experienced a full or partial suspension of operations due to the COVID-19 pandemic or a significant decline in gross receipts. Once eligibility is determined, calculating the tax credit amount is straightforward.
Businesses with more than 100 full-time employees will calculate their tax credit only for wages paid to employees for time that was not worked due to the crisis. Wages can include cash wages, health care benefits, noncash wages (such as meals and lodging) and contributions to qualified retirement plans. The qualified wages used in calculating the credit may not exceed $10,000 per employee, making the maximum allowed credit $5,000 per employee from all quarters of 2020 combined.
For businesses with fewer than 100 full time equivalents (FTEs), ERTC is based on total qualified wages and health care costs incurred during 2020 and paid by the end of 2021. These qualified wages are limited to those actually paid while business operations were suspended or gross receipts declined compared with 2019 levels. For lower-paid employees (<$10k qualifying wages), any qualifying benefit costs can be counted towards both ERTC and PPP loans purposes up to $4k. The maximum total allowed credit for these employers is $5k per FTE ($10k max per employee). Employers may also use payroll taxes instead of free cash flow in order to fund qualifications for these credits.
The Employee Retention Credit allows businesses that pay their employees’ salaries during this time of crisis an opportunity to gain relief from payroll taxes associated with those salaries or contributions made towards FICA taxes on behalf of their employees via qualified expenses such as healthcare benefits incurred during 2020 up until December 31st 2021 depending on whether they meet the criteria outlined by IRS guidance https://www.irs.gov/newsroom/employee-retention-credit-available-for-many-businesses-financially-impacted-by-covid19. See relevant regulations here: https://www.irs.gov/pub/irs_pdf/f7452pc20pdf
Calculating the refundable portion of the tax credit
The Employee Retention Tax Credit (ERTC) is a refundable federal tax credit available to employers that have seen a decline in gross receipts as a result of the COVID-19 pandemic. The credit is designed to help employers offset some of the expenses associated with retaining their employees during the crisis.
The credit amount is equal to 50% of qualified wages (including health benefits) paid after March 12, 2020 and before January 1, 2021. The maximum amount an employer can claim for each employee for each calendar quarter is $7000. The refundable portion of the tax credit cannot exceed an employer’s total taxes owed for the quarter.
To calculate the refundable portion of an eligible employer’s ERTC for any given quarter, one should:
- Calculate total qualified wages paid during that quarter. Qualified wages are generally salary or hourly pay excluding certain payments made to certain owners under specific circumstances. Qualified wages can also include certain forms of health plan expenses related to Medicare, Medicaid, or other government-funded programs; however full-time sole proprietors and 2% shareholders in S Corporations are not eligible for this calculation regardless of employee class type or benefits received by them.
- Multiply the total qualified wages by 50%, as this is the maximum percentage that qualifies for the ERTC rate established by law. This may be further subject to limitations based on either total quarterly revenues or average number of employees compared with 2019 data depending on how long an employer has been in operation and their business model type.
- Subtract any ERTC credits already claiming from payroll tax deposits (IRS Form 941).
- The difference between these numbers is the refundable portion of your ERTC which can then be used against your quarterly tax deposit (IRS Form 941).
The Employee Retention Tax Credit (ERTC) is a tax benefit program administered by the IRS that helps employers offset the economic hardship of the continuing pandemic. It provides an incentive for employers to retain employees, reduce layoffs, and keep salaries steady.
To qualify for the ERTC, employers must meet certain requirements. In this article, we'll discuss how to claim the ERTC and what steps employers need to take in order to qualify:
- Step 1: Determine if your business is eligible.
- Step 2: Calculate the amount of the credit.
- Step 3: Claim the credit on your tax return.
- Step 4: Keep records of your ERTC.
How to claim ERTC on your tax return
The Employee Retention Tax Credit, also known as ERTC, is a refundable federal tax credit designed to help businesses retain employees who might have been laid off or experienced reduced hours due to the COVID-19 pandemic. Eligible employers can use the credit to offset their payroll taxes and other employment costs.
If you are an eligible employer, you will need to complete Form 941-X in order to claim ERTC on your tax return. This form must be completed for each quarter of the calendar year for which you are claiming the credit. The form is available from the Internal Revenue Service (IRS) website at http://www.irs.gov/forms/.
In order to accurately calculate your credit amount, you must provide information about your qualified wages, eligible wage period and payroll taxes for each of quarters for which you are claiming a credit. Once completed and submitted with supporting Documentation, your credit will be posted against your federal income tax return when filed with the IRS using Form 1040 or Form 1040-SR.
Keep in mind that ERTC applies only to current quarter wages (e.g., 2020 Q2 wages received after March 12th). Any prior quarter’s wages (prior quarters before 2020 Q2) must be reported separately as Prior Quarter Wages on Line 5 of Schedule R—which must be attached with both Forms 941 and 1040 or 1040-SR to claim any applicable Prior Quarter Wages earned during those quarters in 2021 not previously claimed in 2020 Quarterly Tax Returns filed before January 15th 2021 deadline).
Finally, make sure that all Forms 941s used during each subsequent quarter following receipt of funds from PPP Loan forgiveness can exclude already paid employee wages from this Second Round Employee Retention Credit Calculation—ensuring that employers do not double-count employee retention expenses across both programs while still qualifying those eligible salaries earned before PPP Loan funds utilized by employer organizations qualifying under specific criteria or requirements; such criteria should be consulted with financial professionals prior advancing on any filing activity developed around this subject matter at hand today with any questions or concerns consistently resolved accordingly—in order for all organizations involved a collective thorough understanding final submission processes outlined by taxation entities according equitable resolution/compliance developments discussed herein today’s document itself sooner rather than later timescales found delineated within this article body display area now concluded upon reviewing/analyzing thereof such consequences issued accordingly thereafter thereafter concurrently therein soundly during comprehended lengths offered thus far established continual precepts clearly into betterment from these engagements solely written since inception fundamentals stated fully herein besides existing perceptible constructs therein many factors now coalesced finally together overall completed task summation thoroughly.
How to claim ERTC through payroll
When claiming the Employee Retention Tax Credit (ERTC), eligible businesses can claim it through payroll. This method is available for wages paid after March 12, 2020 and before January 1, 2021. To take advantage of this in payroll, employers must reduce the amount of federal employment taxes they are otherwise required to deposit in order to receive an advance of the ERTC.
Here's how to proceed:
- Identify Eligible Employees: Employers must first determine which employees are eligible for ERTC. Generally speaking, employers are eligible if their operations were fully or partially suspended during any calendar quarter due to orders from a government authority that limit business operations based on COVID-19; or if they experienced a substantial decline in gross receipts during a calendar quarter compared with the same quarter in 2019.
- Calculate Eligible Wages and Qualified Health Plan Expenses: Employers must also calculate the wages and qualified health plan expenses paid to each eligible employee for purposes of ERTC recovery as either (1) wages of up to $10,000; or (2) qualified health plan expenses incurred from March 13th, 2020 through December 31st, 2020.
- Reduce Employment Tax Deposits: Employers may then reduce their deposits of federal employment tax by reducing deposits throughout the year or through annualized procedures that reconcile overpayments at year end for amounts overclaimed throughout 2021; or claim credits when filing their 941 Quarterly Payroll Returns starting with calendar quarter two (2Q) that overlaps April 1st – June 30th.
- Submit IRS Form 941-X: To receive payment on an immediate basis without waiting until filing time at year end, employers can submit IRS Form 941-X Quarterly Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund with attached Schedule A as set forth in instructions provided by IRS Form 941-X. The taxpayer should complete form 941-X but must use preprinted forms and serial numbers allocated for Forms 941 filed on magnetic media with internal revenue service centers located at Andover MA, Philadelphia PA, Ogden UT, Austin TX, or Kansas City MO. The taxpayer can then submit the form along with its regular quarterly returns filing electronically via Electronic Federal Tax Payment System eftps.gov website.
How to get the ERTC in advance
The Employee Retention Credit (ERTC) is a refundable payroll tax credit established by the Coronavirus Aid, Relief, and Economic Security (CARES) Act to encourage employers to keep employees on their payroll during the COVID-19 pandemic. Employers who qualify can generally claim the credit each quarter they are eligible.
There are two ways to receive ERTC in advance:
- Filing for an advanced payment from the IRS or
- Taking a wage reduction from your employees.
When you file for an advanced payment, the IRS will pay you up front instead of waiting until you file your quarterly tax return to be refunded. Filing for an advanced payment requires that you provide the appropriate documentation, including income statements and other state wages and taxes information. However, this option can be complex and time consuming.
The second way to get ERTC in advance is through a wage reduction from your employees. With this option, employers can deduct wages directly from employee paychecks and apply those wages as ERTC payments directly on their W-2s or Form 941s each quarter or semiannually—eliminating the need to file a request with the IRS. This method may be simpler than filing for an advanced payment but depending on how much you’re claiming in ERTC could mean higher payroll costs if they are not offset by PPP Loan funds.