Pay Attention to the Employee Retention Tax Credit

Pay Attention to the Employee Retention Tax Credit

September 05, 2023

The Employee Retention Tax Credit (ERTC) is a refundable payroll tax credit that helps businesses keep employees on payroll, even if they are not working, during challenging economic times, such as the COVID-19 pandemic. ERTC was introduced as part of the Coronavirus Aid, Relief and Economic Securities (CARES) Act in March 2020 and is available to eligible employers of any size that are engaged in a trade or business.

Many of our small business clients took advantage of ERTC the last several years. If you were awarded the ERTC credit, please reach out to your tax advisor so that we can prepare the necessary amendments to your business and personal tax returns. Since we did not process those applications or 941 amendments, we do not who received the credit unless you tell us. 

Eligibility Criteria. Eligible employers are those that pay wages in a calendar quarter in which business operations are fully or partially suspended due to certain COVID-19-related government orders or that have experienced a significant decline in gross receipts. In 2020, tax-exempt organizations were included; however, government entities were not. In 2021, certain government entities, including colleges, universities, hospitals and medical care providers, were declared eligible. Please note that if you are using the suspension of business operations provision for any quarter, you need to be able to prove that there was a government mandate that required, not suggested, that you cease operations. You are responsible for documenting the mandates that you used to support your eligibility. Those mandates are not always maintained on the government sites that originally post them, so it is a good idea to keep a copy with your ERTC records.

Credit Amount. The credit covers a portion of qualified wages paid to eligible employees during the eligible periods. In 2020, the maximum credit was 50% of qualified wages, up to $10,000 per employee per year, which means the maximum credit per employee annually was $5,000. In 2021, the maximum credit was 70% of qualified wages, up to $10,000 per employee per quarter, making the maximum credit per employee $21,000.

Qualified Wages. Qualified wages include both cash compensation and certain employer-provided benefits, such as health insurance. The definition of qualified wages can vary depending on the specific period and circumstances. 

Claiming the Credit. Businesses can claim ERTC on their federal employment tax returns (i.e. Form 941). The credit can be claimed against the employer’s share of Social Security taxes. If the credit exceeds the amount of employment taxes owed, the excess can be refunded.

Interaction with PPP Loans. Originally, businesses that received Paycheck Protection Program (PPP) loans were not eligible for ERTC. However, this changed with subsequent legislation, allowing businesses to claim ERTC even if they received a PPP loan, but the same wages cannot be used for both ERTC and PPP forgiveness.

Extension and Changes. ERTC has been extended and modified multiple times since its inception. Changes include expanding eligibility criteria, increasing credit percentages and adjusting the maximum credit per employee.

It's important to note that the details of the Employee Retention Tax Credit may continue to change over time due to updates in legislation and government regulations. If you are a business owner or an individual looking to take advantage of this credit, it's recommended to consult with a tax professional who can provide up-to-date and accurate information based on your specific situation.