If your business’s bottom line has been affected by the COVID-19 pandemic, you should be aware of the new Employee Retention Tax Credit (ERTC) requirements.
Remember the $900 billion stimulus package passed as part of the Consolidated Appropriations Act (CAA) back on December 27, 2020? It includes an important update to the ERTC.
As a result, you might have an opportunity to save thousands of dollars per employee, so long as you meet those ERTC requirements.
Briefly, the requirements are:
Must Be Classifiable As a Small Business
Your business must have 500 or fewer employees, which is the general definition of a small business under the Small Business Act (SBA).
Have Experienced Disruption or Revenue Reduction
To qualify as having reduced revenue, your business must either have:
- Been fully or partially suspended by a governmental authority because of COVID-19
Or
- Has experienced a significant reduction in gross receipts in 2020 compared to 2019, on a quarterly basis.
Now we’ll look closer at the specifics of the ERTC and what’s changed recently.
What is the ERTC?
The Employee Retention Tax Credit (ERTC) was part of the first stimulus package back in March, formally known as the Coronavirus Air, Relief, and Economic Security (CARES) Act. Included in that package were provisions like the $1200 stimulus checks, the Paycheck Protection Program loan (PPP), and the ERTC, among others.
Many people group the ERTC and the PPP together, and for good reason: Both provide financial assistance for cash-strapped businesses. The PPP is a small business loan program, while the ERTC, as its name implies, is a tax credit employers can apply to employee wages.
How does the ERTC work?
The ERTC, as it is now written, works like this:
For wages paid between March 12, 2020 and January 1, 2021, the credit is 50% of wages, up to $10,000 per employee.
For wages paid after the start of this year through June 30, the ERTC can be applied to 70% of qualifying wages at up to $10,000 per employee. In total, companies can receive up to $14,000 per employee through June 30.
Wages doesn’t only mean cash. It can also apply to a portion of employer-provided health care. It does not, however, include paid sick leave or family leave.
Certain regulations for the initial ERTC back in March made it an unattractive option for many businesses. As a result, the ERTC is not as well known as it should be, even though the recent adjustments to the credit have made it a great way for small-or-medium-sized businesses to retain employees.
What Has Changed Since March?
There are a few differences between the initial ERTC from March and its current iteration. For the most part, these changes have eased the Employee Retention Tax Credit’s requirements, allowing more businesses to take advantage of it.
Now You Can Use Both the PPP and the ERTC
The first round of stimulus required businesses to choose between the Paycheck Protection Program and the ERTC. Most people decided that the PPP would allow for more savings. For many of them, that was probably the correct decision.
As of December, you no longer have to pick one — businesses can apply for both the PPP and the ERTC. Also keep in mind, you can now retroactively claim tax credits for 2020, even if you were one of those businesses that chose PPP initially.
It’s Easier to Meet the Employee Retention Tax Credit Requirements Than it Used to Be
The new version of the ERTC casts a wider net. It allows larger businesses and businesses that did not suffer as significant losses to receive the tax credit.
The employee limit of 500 is up significantly from the ERTC’s original limit of 100 employees. Many larger small businesses are now going to be able to use the credit.
The revenue limit has also become easier to meet. It was initially a 50% decline, so the new 20% decline guideline (from one quarter in 2021 to that same quarter in 2020) means there’s a much better chance your business is able to now claim the credit.
Is My Company Eligible?
ERTC refunds are rewarded on a quarterly basis. This means that your business could receive ERTC funds for the first three quarters of 2020 where your gross receipts declined, but lose eligibility for the last quarter.
Eligibility is not a matter of checking off a few boxes; it’s the number of quarters in which your business suffered “a significant decline in gross receipts.”
When Eligibility Begins: Eligibility begins on the first day of any 2020 quarter where gross receipts declined by 20% or more compared to the same quarter in 2019.
When Eligibility Ends: Eligibility ends on the first day of any 2020 quarter that your business’ gross receipts exceeded 80% compared to the same quarter in 2019.
Here’s an example of a business that is eligible for Q1 – Q3 of 2020 but not for Q4 of 2020:
A business’ gross receipts for Q1, Q2, and Q3 of 2020 declined by 25% compared to Q1, Q2, and Q3 of 2019. However, in Q4 of 2020, the business’ gross receipts exceeded 85% compared to Q4 of 2019.
Notice that, in Q4, gross receipts exceeded by 80% the loss suffered in Q4 of 2019. The business is eligible for Q1, Q2, and Q3 only.
For tax-exempt organizations, the situation is different. Organizations such as 501(c)s must have partially or fully suspended operations in 2020 or 2021 to qualify.
How Can I Apply?
The credit is applied against a business’s portion of payroll taxes, which are reported quarterly. If the credit is larger than the employment taxes for that period, you can receive the difference as a refund, either at the end of the quarter or in advance.
Here’s the form you’ll need to apply: Form 7200.
Be sure to verify your eligibility and submit your application as soon as possible. Act now. Do not wait until April.
Again, you can go back retroactively and apply for 2020. If you do meet those requirements, we highly recommend you do so, even if you initially chose PPP.
Have Questions? Let’s Talk.
If you’re interested in finding a CPA to guide you and your business through the application process for PPP2 or the ERTC, call my office at 682.224.3243 or schedule an appointment.
Regardless of whether you choose to consult with my office, we advise any reader to speak with a CPA before using the information in our blogs to make financial decisions.
Stay Smart & Stay Informed,
Jeremy A. Johnson, CPA