Recently, we’ve been hearing questions from our clients about whether they qualify for the Employee Retention Tax Credit.
Employers eligible for this tax credit must have been in business in 2020 or 2021, and meet one of the following benchmarks:
- The Government Order: The employer must have experienced “a calendar quarter in which the trade or business is fully or partially suspended…due to an order from an appropriate government authority limiting commerce, travel, or group meetings due to Covid-19.”
- Reduced Gross Receipts: To meet the gross receipts requirement, an employer must have experienced a “significant decline” in gross receipts during at least one quarter in the calendar year. For 2020, this means a decline of at least 50% in any quarter when compared with the same time frame in 2019. For 2021, this means a decline of at least 20% in any quarter when compared to the same time frame in 2019. For 2021, you can also meet this test if your gross receipts in the last quarter of 2020 were at least 20% less than your gross receipts in the last quarter of 2019.
- Recovery Startup Business: The American Rescue Plan Act added this third category of eligible employers. To qualify as a Recovery Startup Business, one must have begun carrying on a trade or business after February 15, 2020, have annual gross receipts that do not exceed $1 million, and not be eligible for the Employment Retention Tax Credit under the other two categories. This category only applies to the third and fourth quarters of 2021.
The Infrastructure Investment and Jobs Act, which is expected to be signed into law, makes wages paid after September 30, 2021 ineligible for the credit, except for wages paid by an eligible recovery startup business.
For 2021, eligible employers can get a credit equal to 70% of qualifying wages per quarter. The maximum credit per quarter is $7,000 per employee.
Eligible wages for the ERTC for a small employer (100 or less employees in 2020 and 500 or less employees in 2021) are all wages and health insurance benefits paid to an employee during the time in which the employer is considered an eligible employer. Only the wages and health insurance benefits paid to an employee who is not providing services are eligible wages for the credit for large employers. Eligible wages for the ERTC do not include wages for various other tax credits and PPP loan forgiveness.
Like most tax legislation, the calculation and application of the Employee Retention Tax Credit is complex. Please let us know if you believe you may qualify for this credit or if you have any questions about it, and we will be happy to help.