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Understanding the Employee Retention Tax Credit: Who Qualifies?

In these challenging times, businesses are seeking ways to maintain their workforce and minimize financial strain. One such solution is the Employee Retention Tax Credit (ERTC), a government-backed initiative aimed at supporting employers in retaining employees amid economic hardships. In this guide, we'll delve into the eligibility criteria for the ERTC and provide essential information for businesses considering applying for this credit.

Overview of the Employee Retention Tax Credit

The ERTC was initially introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020. It has since been extended through various legislation, including the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021.

This tax credit offers eligible employers a percentage of qualified wages paid to employees during specified periods affected by the COVID-19 pandemic. The credit applies against the employer's share of Social Security payroll taxes and can help reduce overall tax liability while encouraging employee retention.

Eligibility Criteria for Employers

Determining whether your business qualifies for the Employee Retention Tax Credit involves assessing several key factors. The following are the primary requirements for eligibility:

Significant Decline in Gross Receipts

To qualify for the ERTC, an employer must have experienced a significant decline in gross receipts during a calendar quarter compared to the same period in 2019. For 2020, a significant decline is defined as a 50% or more reduction in gross receipts, while for 2021, a 20% or more reduction is considered significant.

Government-Mandated Full or Partial Suspension of Operations

An employer may also be eligible for the ERTC if their operations were fully or partially suspended due to a government order related to COVID-19 during a calendar quarter. This includes orders from federal, state, or local authorities that limit commerce, travel, or group meetings in a manner that affects the employer's ability to operate.

Eligible Employer Status

The following types of employers may be eligible for the ERTC:

  • Private-sector businesses,
  • Tax-exempt organizations under Section 501(c) of the Internal Revenue Code,
  • Certain governmental entities, and
  • Self-employed individuals with employees.

Note that certain employers are expressly excluded from eligibility, such as government instrumentalities, companies receiving Paycheck Protection Program (PPP) loans, and those subject to other specific restrictions.

Employee Retention Tax Credit Amounts

The amount of the ERTC available to eligible employers varies based on the year and the specific circumstances:

ERTC Amounts for 2020

For qualified wages paid between March 13, 2020, and December 31, 2020, an eligible employer can claim a maximum credit of 50% of qualified wages up to $10,000 per employee, resulting in a maximum tax credit of $5,000 per employee.

ERTC Amounts for 2021

For qualified wages paid between January 1, 2021, and December 31, 2021, the maximum credit increases to 70% of qualified wages up to $10,000 per employee per quarter, allowing for a potential tax credit of up to $28,000 per employee for the entire year.

What Are Qualified Wages?

The definition of qualified wages depends on the size of the employer's workforce, as well as the year in question:

Qualified Wages for Employers with 100 or Fewer Full-Time Employees (2020) or 500 or Fewer Full-Time Employees (2021)

For smaller employers, qualified wages include both wages paid to employees who are actively working and those who are not working due to a COVID-19-related circumstance. This includes wages, certain health plan expenses, and the cost of providing group health benefits.

Qualified Wages for Employers with More Than 100 Full-Time Employees (2020) or More Than 500 Full-Time Employees (2021)

For larger employers, only wages paid to employees who are not working due to a COVID-19-related circumstance can be considered as qualified wages. This is subject to the same wage and health benefit parameters described above.

Claiming the Employee Retention Tax Credit

To claim the ERTC, eligible employers should report their total qualified wages and any associated health plan expenses on their quarterly employment tax return, Form 941. Employers may also reduce their required payroll tax deposits to account for anticipated credits. In some cases, businesses may request an advance payment of the credit by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Wrapping Up

The Employee Retention Tax Credit is a valuable resource for eligible employers navigating the challenges of the COVID-19 pandemic. By understanding the eligibility criteria and claiming the credit appropriately, businesses can alleviate financial burdens while retaining their workforce. As always, it's essential to consult with a tax professional to ensure compliance with all requirements and maximize the potential benefits of this tax credit program.