Would you like to take advantage of the Employee Retention Tax Credit (ERTC)? You may not have been able to in 2020 but after these retroactive changes to the tax credit, you may want to. In this article, we’ll go through what the ERTC is, who is eligible and the retroactive changes to the tax credit.

What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERTC) is a refundable tax credit against certain employment taxes (Social Security, Medicare, etc.) of qualified wages an employer pays to its employees. The credit was originally set to expire on January 1, 2021 but is now extended to June 30, 2021.

Who is eligible to take advantage of this credit?

Employers, including tax-exempt organizations, are eligible for the credit if they operated a trade or business during calendar year 2020 and experienced either:

1. The full or partial suspension of the operation of their trade or business during any calendar quarter because of governmental orders limiting commerce, travel, or group meetings due to COVID-19, or
2. A significant decline in gross receipts beginning on the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter of 2019. This decline would end on the first day of the calendar quarter following the calendar quarter where gross receipts are more than 80% of its gross receipts for the same calendar quarter in 2019.

Here is where we get into the retroactive changes made to this credit. Previously, if an employer received a Small Business Interruption Loan under the PPP, that employer would not be eligible for the ERTC. Now, thanks to these changes, employers can retroactively claim the ERTC. Though wages cannot be double counted, so an amount can either be counted toward the loan forgiveness under the PPP or towards the ERTC, not both. Furthermore, any payroll costs (W-2 wages or healthcare costs) for which a taxpayer claims the ERTC are not eligible to be forgiven as part of the PPP.

What falls under “qualified wages”?

This first depends on how many employees the eligible employer has.

If the eligible employer has more than 100 full-time employees during 2019, qualified wages are those wages, including healthcare costs, paid to employees that are not providing services due to suspended operations or decline in gross receipts. Originally, only wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship can count.

Here’s another beneficial retroactive change. Allocable health costs are eligible for the credit even if no wages are paid to the employee (i.e. the employee is furloughed)

If an eligible employer averaged 100 or fewer full-time employees during 2019, qualified wages are the same as above except the 30-day look-back rules do not apply for 2020. These wages are qualified regardless of whether its employees are providing services.

You’re probably thinking, okay but how much of these qualified wages can we take as a credit? For 2020, employers can claim a credit for 50% of qualified wages per employee, not exceeding $10,000 per employee for the year.

What if I’m a tax-exempt organization?

A helpful retroactive change clarifies that the gross receipts of a tax-exempt organization in determining if the organization has had more than 50% reduction in gross receipts is the gross receipts reported on form 990.

To learn more about how to take advantage of the Employee Retention Tax Credit please contact us.