By Michael Aaron, CPA, Tax Supervisor & Gregory Bilecki, Senior Accountant
For the 2020 filing year we’ve seen many updates to CARES Act provisions expanded upon by the Consolidated Appropriations Act signed into law on December 27th 2020 and as expected, the refundable Employee Retention Tax Credit (ERTC) was one of them. While there may still be some confusion on what this is and who it applies to, below is a summary which outlines some of the key changes, and how to determine if you qualify.
What Are the Changes to the Employee Tax Credit in 2021?
- Legislation changes which now allow Employers to receive the credit through June 30th, 2021
- Up to $10,000 of qualified wages paid, per employee, per quarter is now in effect for 2021. The credit is equal to 70% of qualified wages which has increased from the prior year. This means the maximum credits allowable per employee for 2021 is $14,000, illustrated as follows:
$10,000 (qualified wages) x .70 (credit factor)
= $7,000 (limit, per employee, per quarter, Q1 + Q2 2021)
$7,000 (first quarter) + $7,000 (second quarter) = $14,000 (total ERTC credit for 2021)
What Payments Qualify for the ERTC? Only Qualified Wages.
“Qualified wages” are those subject to Social Security taxes and group healthcare benefits. (HSA’s or Qualified Small Employer Health Reimbursement Arrangement’s – QSEHRA’s, are not included). Also, it does NOT include Families First Coronavirus Response Act (FFCRA) paid sick, or FMLA wages.
Regarding Allocable Health Plan Expenses:
Include: Health plan expenses for laid-off employees with no pay where the employer continues to cover health insurance costs
Exclude: Health plan costs during the period of time where the employee is employed and is paying for costs with after-tax dollars
Additional wage exclusions: Pre-existing PTO, severances, wages where FFCRA credits were taken, Work Opportunity Tax Credit wages, and employer payroll taxes.
Does My Business Qualify for the ERTC?
- Employers who currently have 500 or fewer full-time employees (those working 30 hours per week or 130 hours per month) on their payroll
- Employers who have had operations fully or partially suspended because of governmental orders limiting commerce, travel, or group meetings due to COVID-19 OR show a 20% or more reduction in gross receipts from the prior year quarter allowed in comparison – here’s a breakdown of how that works:
For Q1 2021, you will compare:
- 2021 Q1 to 2019 Q1 or
- 2020 Q4 to 2019 Q4
For Q2 2021, you will compare:
- 2021 Q2 to 2019 Q2 or
- 2021 Q1 to 2019 Q1
The credit may only be claimed within the quarter for 2021 where operations were suspended, or over a 20% reduction in gross receipts was recognized.
- Employers who have received a PPP loan may now qualify for the ERTC so long as qualified wages used for PPP loan forgiveness are not included in the 941 calculation
- Employers who did not commence operations until 2020 also now qualify
How Does My Business Claim the Employee Tax Credit?
On IRS Form 941, reduce payroll tax deposits for federal income taxes withheld from employees, both portions of social security, and Medicare taxes by the amount of the credit. If you have a payroll company, you must inform them that you qualify as well. If the reduction in payroll taxes leaves an excess amount of credit, you may carry it forward to the next quarter or possibly have it refunded (refer to Worksheet 1 on Form 941). You may also file a Form 7200 multiple times throughout the quarter (if you have not filed Form 941) to claim refund. Currently, this credit is only available for wages paid in 2021.
Contact our business advisory team for help determining your maximum credit.