Tip Sheet: New Employee Retention Tax Credit for Small Businesses Available for 2020 and 2021

Date: March 22, 2021

Up to $33,000 per employee

Talk to your tax professional or bookkeeper about taking advantage of the expanded Employee Retention Tax Credit (ERTC). If you don’t have a CPA or tax professional, you can check here or here to find one in your area.

Enacted March 12, 2021, the new COVID-19 economic recovery law, the American Rescue Plan Act, extends the ERTC program through December 31, 2021. The Consolidated Appropriations Act (CAA) passed in December 2020 offered a more generous tax credit and eliminates a previous restriction for those with a Paycheck Protection Program (PPP) loan. 

What is it?

  • The ERTC is a refundable, advanceable tax credit of up to $7,000 per employee, per quarter.
  • In 2021, the maximum credit per employee is $28,000 ($7,000 in each quarter of 2021).
  • In 2021, the amount of the tax credit is equal to 70% of the first $10,000 ($7,000) in qualified wages per employee in a quarter ($7,000 in Q1 + $7,000 in Q2 + $7,000 in Q3 + $7,000 in Q4).
  • Employers claim the ERTC by withholding payroll taxes for the amount of qualified employee wages. Because the tax credit is refundable, if your withholdings do not cover the entire tax credit, the IRS will send you a check for the remaining amount.

Eligibility:

  • Employers with 500 or fewer employees. (different rules for large employers)
  • Employers who have experienced a 20% or more decline of gross receipts in a quarter compared to the same quarter in 2019 OR subjected to mandatory partial or full shutdown.

FAQ:

I would like to claim the ERTC for 2021 wages. What do I do?

To claim ERTC for 2021 wages, fill out IRS Form 7200, Advance of Employer Credits Due to COVID-19, the same ERTC form used in 2020.

It is important to note that the March 2021 recovery bill extended the ERTC through December 31, 2021, so this credit applies to 2021 wages in Q1, Q2, Q3, and Q4.

What are qualifying wages?

Qualified wages include all forms of wages that are subject to FICA tax.

Wages paid to related individuals are not eligible for the Employee Retention Credit. (more information HERE, Q#59)

I am considering applying for a second-draw PPP loan. Can I claim the ERTC for 2021 wages?

Yes. The December 2020 recovery bill allows PPP loan recipients to access the ERTC and vice versa. The previous prohibition on using both programs has been removed. However, businesses cannot claim the ERTC on wages paid for by the PPP loan.

Employee Retention Tax Credit Overview

 

2020 Rules

New rules:
3/13/2020-12/31/20

New rules:
1/1/2021-12/31/21

Interaction with PPP

No ERTC if received a PPP loan

Taxpayers that receive a PPP loan can claim the ERTC, excluding wages paid for by a PPP loan.

Maximum Tax Credit per Employee

$10,000 for 2020

$5,000 for 2020

$28,000 for 2021

Tax Credit Calculation

50% of the first $10,000 in qualified wages per employee in a quarter

50% of the first $10,000 in qualified wages per employee in a quarter

70% of the first $10,000 in qualified wages per employee in a quarter

 Eligibility

100 employees or less

100 employees or less

500 employees or less

50% reduction in gross receipts a quarter compared to same quarter in 2019 OR subjected to mandatory partial or full shutdown

20% reduction in gross receipts a quarter compared to same quarter in 2019 OR subjected to mandatory partial or full shutdown

I received a PPP loan last year. Can I claim the ERTC on 2020 wages?

Yes. The December 2020 recovery law allows first-draw PPP loan recipients to go back and claim the ERTC on 2020 wages. However, please note the ERTC credit for 2020 wages is limited to 50% of the first $10,000 in qualified wages per employee in a quarter. The maximum credit per employee for 2020 is $10,000. The more generous credit outlined above is for Q1, Q2, Q3, and Q4 in 2021.

Various CPA firms have recommended the steps below for first-draw PPP loan recipients interested in claiming the ERTC:

  1. Determine your eligibility. Was your business mandated to shut down? Or did your business experience a significant decline in gross receipts during the calendar quarter (less than 50% of its gross receipts for the same calendar quarter in 2019)?
  2. If you answered yes to either question, review 2020 wages. Are you able to apply for PPP loan forgiveness and claim ERTC on different wages? You cannot claim PPP loan forgiveness and ERTC on the same wages.
  3. If yes, your business has 2020 wages eligible for ERTC, then prepare estimates of ERTC for 2020.
  4. On claiming the ERTC for 2020 wages, continue with the preparation of your 2020 fourth quarter Form 941, but consider waiting to file in the hopes that the Treasury Secretary is able to provide guidance before February 1. That said, the Department of Treasury may direct employers to complete Form 941X, Adjusted Employer’s Quarterly Federal Tax Return of Claim for Refund. Or the Department of Treasury may create a new form specifically to claim the ERTC for 2020 wages.

 

Many taxpayers have completed or are close to completing their 2020 payroll computations and are now wondering, how can Congress expect them to make this determination with their payroll provider when there is no guidance, and the filing date is less than a month away? The Department of Treasury will need to provide guidance on this issue.

Additional resources: IRS Employee Retention Tax Credit website and FAQs. Note: these resources have not yet updated to reflect the ERTC changes enacted in the CAA.

Dated March 12, 2021

Related Content: Analysis | Coronavirus | National | Taxes

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