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Does My Business Qualify for the Employee Retention Tax Credit In 2021?

By Michael Aaron, CPA, Tax Supervisor

For the 2020 filing year we’ve seen many updates to the CARES Act provisions which expanded upon the Consolidated Appropriations Act which was signed into law on December 27, 2020. The refundable Employee Retention Tax Credit (ERTC) was one of the updates. While there may still be some confusion on what this is and who it applies to, we’ve drafted a summary below which outlines some of the key changes, and how to determine if your business qualifies.

What Are the Changes to the Employee Tax Credit in 2021?

  • Legislation changes allow Employers to receive a refundable tax credit against payroll taxes paid when filing payroll tax returns through June 30, 2021.
  • A $7,000 credit for qualified wages paid, per employee, per quarter is now in effect for 2021 (subject to a 70% limitation), up from a $10,000 credit per employee for the entire year. This means the maximum credits allowable per employee for 2021 is $14,000, illustrated as follows: 

$10,000 of wages x 70% = $7,000 (limit, per employee, Q1 + and Q2 of 2021) 

$7,000 (Q1) + $7,000 (Q2) = $14,000 (total ERTC credit for 2021)

Employer Qualifiers (aka, “Does My Business Qualify?”): 

  • Employers who had 500 or fewer full-time employees (those working 30 hours per week or 130 hours per month) on their payroll in 2019
  • 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 – here’s a breakdown of how that works:

For Q1 2021, you will compare:

  • 2021 Q1 gross receipts to 2019 Q1 gross receipts or
  • 2020 Q4 gross receipts to 2019 Q4 gross receipts

For Q2 2021, you will compare:

  • 2021 Q2 gross receipts to 2019 Q2 gross receipts or
  • 2020 Q4 gross receipts to 2019 Q4 gross receipts

The credit may only be claimed within the quarter for 2021 where operations were suspended, or a 20% reduction in gross receipts was recognized. 

  • Whether you’ve received a PPP loan or not, you may now qualify for the ERTC. This was a ruling for loans made through March 12, 2020 – so long as qualified wages used to support the PPP loan terms are not the same qualified wages used to support the terms of the ERTC, whether the PPP loan was forgiven or not
  • Employers who did not commence operations until 2020 also now qualify
  • Employers who formed a business after February 15, 2020, may qualify as a “Recovery Start-Up Business”
    • Must not meet the revenue test or suspension test
    • Must have less than $1,000,000 in gross receipts
    • Credits allowed are capped at $50,000 per quarter
    • Allows access to qualify in 4th quarter of 2021

To Claim the Credit: 

With January 31, 2022 passing, taxpayers are now unable to claim the credit by filing form 7200 or on their originally filed 941’s. They now need to file using form 941-X, to amend 2020 and 2021 payroll tax returns. 

Contact our business advisory team for help determining your maximum credit.