Understanding Employee Retention Tax Credit Qualifications
In 2020, the U.S. government introduced the Employee Retention Tax Credit (ERTC) as part of the CARES Act to help businesses affected by COVID-19. The primary goal of this tax credit is to support companies in retaining their employees during challenging economic times. This article delves into the qualifications and requirements that employers need to fulfill to become eligible for the ERTC.
Eligible Employers and Qualified Wages
To better understand employee retention tax credit qualifications, it's essential to first define an eligible employer and qualified wages. An eligible employer is a business or non-profit organization whose operations have been fully or partially suspended due to government orders related to COVID-19, or one that has witnessed a significant decline in gross receipts compared to the same quarter in 2019.
Qualified wages are the amounts paid by an eligible employer to its employees during the applicable periods where the business was impacted by COVID-19. These wages may include salaries, hourly pay, commissions, bonuses, and other forms of employee compensation, along with the employer's share of health insurance costs.
Determining Eligibility for the ERTC
For an employer to qualify for the ERTC, certain conditions need to be met. These conditions depend on the size of the company and the period within which the employer seeks the tax credit.
Employer Size and Qualified Wage Thresholds
Small employers, defined as those with up to 500 full-time employees, can claim the tax credit for all qualified wages paid to employees during the suspension of business activities or the reduction in gross receipts. On the other hand, large employers, with more than 500 full-time employees, can only claim the tax credit for wages paid to employees who are not providing services due to the impact of COVID-19.
Applicable Periods for Claiming the ERTC
The eligibility criteria for claiming the ERTC vary according to the applicable period. There are two primary periods to consider:
- 2020 ERTC: Employers can claim the tax credit for qualified wages paid between March 13 and December 31, 2020. For this period, a business is considered eligible if its operations were fully or partially suspended due to government orders, or if it experienced a decline in gross receipts by more than 50% compared to the same quarter in 2019.
- 2021 ERTC: Employers can claim the tax credit for qualified wages paid between January 1 and September 30, 2021. For this period, a business is considered eligible if its operations were fully or partially suspended due to government orders, or if it experienced a decline in gross receipts by more than 20% compared to the same quarter in 2019.
Calculating the Employee Retention Tax Credit
The amount of tax credit an eligible employer can claim depends on the applicable period and qualified wages paid to employees.
2020 ERTC Calculation
For the 2020 ERTC, the maximum amount of credit that can be claimed is 50% of qualified wages paid up to a limit of $10,000 per employee (resulting in a maximum tax credit of $5,000 per employee) during the entire period between March 13 and December 31, 2020.
2021 ERTC Calculation
For the 2021 ERTC, the maximum amount of credit that can be claimed is 70% of qualified wages paid up to a limit of $10,000 per employee per quarter (resulting in a maximum tax credit of $7,000 per employee per quarter) during the applicable period between January 1 and September 30, 2021.
How to Claim the Employee Retention Tax Credit
To claim the ERTC, employers can reduce their employment taxes by the amount of the credit. If the tax credit exceeds the employer's share of Social Security taxes owed for a given quarter, the excess credit can be carried forward or refunded. Employers must report their total qualified wages and the related health insurance costs on their quarterly employment tax returns (Form 941).
Interaction with Other COVID-19 Relief Programs
Employers who received Paycheck Protection Program (PPP) loans may still qualify for the ERTC. However, they cannot claim the tax credit for wages covered by PPP loan forgiveness. Additionally, employers who take advantage of the Work Opportunity Tax Credit, Families First Coronavirus Response Act (FFCRA) credits, or other similar relief programs should ensure that they do not double-dip and claim multiple credits for the same wages.
In summary, the Employee Retention Tax Credit offers valuable financial support to businesses affected by the COVID-19 pandemic. By understanding the qualifications and requirements of the program, eligible employers can maximize their tax savings and better navigate these challenging economic times.