Tip Sheet: Employee Retention Tax Credit for Small Businesses Available for 2020 and 2021 (through Q3), Still Available Retroactively

Date: March 22, 2021

Up to $26,000 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.

What is it?

  • The ERTC is a refundable payroll tax credit.
  • In 2020, the maximum credit per employee is $5,000.
  • In 2021, the maximum credit per employee is $21,000 ($7,000 in Q1, Q2, Q3 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).
  • Employers claim the ERTC retroactively by amending your payroll taxes (using Form 941-x) for the amount of qualified employee wages.

Eligibility:

  • Employers with 500 or fewer employees (different rules for large employers).
  • Employers who have experienced a 50% (in 2020) and/or 20% (in 2021) or more decline of gross receipts in a quarter compared to the same quarter in 2019 OR subjected to mandatory partial or full suspension of business operations (applies to both 2020 and 2021).
  • For 2021 only, a business can also qualify using its gross receipts under the alternative quarter election rule. Under this rule, a business qualifies for the ERTC in one quarter if the gross receipts of the immediately preceding calendar quarter are at least 20% lower than the same 2019 calendar quarter.
Employee Renention Tax Credit Overview
 
2020 rules:
3/13/20 – 12/31/20
2021 rules:
1/1/21 – 9/30/21
Interaction with PPP
Taxpayers who receive a PPP loan can claim the ERTC, excluding wages paid by a PPP loan.
Maximum Tax Credit per Employee
$5,000 for 2020 $21,000 for 2021
Tax Credit Calculation
50% of the first $10,000 in qualifed wages per employee in a quarter 70% of the first $10,000 in qualifed wages per employee in a quater
Eligibility
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

FAQ:

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

It is important to note that the March 2021 recovery bill extended the ERTC through September 30, 2021, so this credit applies to 2021 wages in Q1, Q2, and Q3.

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). Wages of owners and their spouses generally do not qualify. More information on owner and spousal wages HERE.

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.

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

Yes. 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 $5,000. The more generous credit outlined above is for Q1, Q2, and Q3 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 suspend operations? 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, employers need to amend their 2020 payroll taxes by filling out the Form 941X, Adjusted Employer’s Quarterly Federal Tax Return of Claim for Refund.

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 January 27, 2022

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