What is the Employee Retention Tax Credit?

As an incentive to employers of all sizes to keep employees on payroll, the Employee Retention Tax Credit (ERTC) was created to help employers navigate the unprecedented impact of COVID-19. The ERTC is a refundable tax credit formed within the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), and further extended/expanded under the Consolidated Appropriations Act (CAA) and American Rescue Plan Act (ARPA). Originally, to be eligible for the credit as of March 2020, an employer must actively carry on a trade or business during the calendar year 2020 and meet either of the following:

If an eligible employer experiences a calendar quarter in which trade or business is fully or partially suspended due to an order of government authority restricting commerce, travel or group meetings (this includes but is not limited to commercial, social and religious purposes) due to the COVID-19 pandemic.

If an eligible employer experiences a significant decrease in gross receipts (AKA revenue) resulting in more than a 50% drop when compared to the same quarter in the previous year. (Until gross receipts exceed 80% of gross receipts in the prior quarter).

Originally, the credit was worth 50% of qualified wages including health care benefits up to $10,000 per eligible employee from March 13, 2020 December 31, 2020. In other words, the maximum benefit for 2020 resulted in credit of up to $5,000 per employee.  Companies can STILL do this today.

In December 2020, Congress revised the provision resulting in the Consolidated Appropriations Act (CAA), extending the credit for eligible employers that continue to pay wages during COVID-19 closures or recorded reduced revenue through June 30, 2021. The CCA also:

The American Rescue Plan Act (ARPA) was created to increase the speed of recovery to the economic and health struggles faced by COVID-19. The new law extended the ERTC through the end of 2021 and expands the pool of employers who can take advantage of the credit by including so-called recovery startup businesses. A recovery startup business generally is an employer that:

While these employers can claim the credit without suspended operations or reduced receipts, it is limited to $50,000 total per quarter. The ARPA also targets extra relief at severely financially distressed employers, meaning those with less than 10% of gross receipts for 2021 when compared to the same period in 2019. Such employers can count as qualified wages any wages paid to an employee during any calendar quarter regardless of employer size. Otherwise, the ARPA continues to distinguish between large employers and small employers for purposes of determining qualified wages. Note that the ARPA extends the statute of limitations for the IRS to evaluate ERC claims. The IRS will have five years, as opposed to the typical three years, from the date the original return for the calendar quarter for which the credit is computed is deemed filed.

Prior to the passage of the ARPA, the IRS issued additional guidance on the ERTC that helps determine whether operations were partially suspended because of a COVID-19-related government order. The IRS has previously stated that more than a nominal portion of operations had to be suspended, meaning:

The ERTC is a payroll tax credit to be reported on Form 941 and may be up to a total of $33,000 per employee for 2020/2021 depending on facts. Any eligible employer can claim ERTC in either/both 2020 and 2021. Special care should be taken when calculating and claiming the credit, especially if the business also received a PPP loan, or other government funding since COVID-19, as IRS rules required an analysis to avoid any double-dipping. Every business is unique and the amount of your ERTC will vary depending on the time period, number of employees, and other factors. To effectively position your business with the benefits of the ERTC, it is encouraged to partner with a tax consultant who knows your industry and the tax laws.