Q. A business associate of mine just told me about a tax credit available to employers who have kept employees on through the pandemic. What is this tax credit all about? Does my business qualify?
A. The Employee Retention Credit (ERTC) is a refundable credit that “eligible” employers can claim on “qualified wages”, including group health insurance costs, paid to employees between March 13, 2020 and September 30, 2021. The credit is claimed on either an original Form 941 or an amended Form 941-X. The rules for 2020 are somewhat different from the rules for 2021.
For 2020, you are an eligible employer for purposes of the credit (on a quarterly basis) if either of the following is true:
1. Your business was suspended or had to reduce business hours due to a government order.
2. Your business had a significant decline in gross receipts.
A significant decline in gross receipts begins:
On the first day of the first calendar quarter of 2020 for which an employer’s gross receipts are less than 50% of its gross receipts for the same calendar quarter in 2019.
The significant decline in gross receipts ends:
On the last day of the first calendar quarter following the calendar quarter in which gross receipts are more than 80% of its gross receipts for the same calendar quarter in 2019.
The credit is equal to 50% of up to $10,000 per quarter, per year in qualified wages paid to each employee (i.e., the maximum credit in 2020 for each employee is $5,000).
For 2021, you are an eligible employer for purposes of the credit if either of the following is true:
1. Your business was fully or partially suspended or had to reduce business hours due to a government order.
2.
- For Q1, your business had a reduction in gross receipts of at least 20% compared to the same quarter in 2019 OR
a 20% reduction in gross receipts from the previous quarter Q4 2020 compared to Q4 of 2019.
- For Q2, your business had a reduction in gross receipts of at least 20% compared to the same quarter in 2019 OR
a 20% reduction in gross receipts from the previous quarter Q1 2021 compared to Q1 of 2019.
- For Q3, your business had a reduction in gross receipts of at least 20% compared to the same quarter in 2019 OR
a 20% reduction in receipts from the previous quarter Q2 2021 compared to Q2 of 2019.
- The credit is equal to 70% of up to $10,000 in qualified wages paid to each individual employee per quarter (i.e., the maximum credit in 2021 for each employee is $7,000 x 4 quarters = $28,000).
Conclusion
As you can see, there are many ways to qualify for the Employee Retention Credit (ERC) using gross receipts. If your business fails the gross receipts test, you may still qualify if your business was suspended by government order for part or all of a quarter.
“Qualified wages” are defined as:
. Wages in excess of the wages included on your PPP loan forgiveness application.
. Group health insurance costs.
. Wages other than wages paid to a more than 50% “owner”.
. Wages other than wages paid to any employees during the period when your business was suspended
Note that because of the attribution rules involved, ownership is calculated both directly and indirectly.
Indirect ownership is attributed to close relatives, whether or not they are direct owners (family attribution).
Note that when you file the income tax return for your business, you’ll have to reduce the deduction for employee wages by the amount of qualified wages claimed for the ERTC. The same is true for health insurance costs. If your business has already filed a 2020 income tax return, an amended business return will have to be filed, which will also necessitate an amended personal return.