Employee Retention Credit
Up to $33,000 per employee
as refundable payroll tax credit for 2020+2021
First introduced by the CARES Act, the Employee Retention Tax Credit (ERTC) has since been greatly expanded. PPP borrowers can now claim the ERTC, as can companies that started a new trade or business.
The CARES Act created the Employee Retention Tax Credit (ERTC) in March 2020. But its usefulness was limited until the Consolidated Appropriations Act in December 2020 and the American Rescue Plan Act in March 2021.
Maximum per employee = $5,000 per year in 2020.
50% decline in gross receipts or government shutdown.
At first, PPP borrowers were not eligible.
Maximum per employee = $7,000 per quarter in 2021.
Gross receipts threshold reduced to 20%.
Now, PPP borrowers are eligible in both 2020 and 2021.
ARP Act, Recovery Startup:
Small businesses that started a new trade
after February 15, 2020 may claim
up to $100,000 in Q3/Q4 of 2021.
THE EMPLOYEE RETENTION TAX CREDIT IS NOW WORTH MORE TO MORE COMPANIES
Recover cash for your business with the Employee Retention Tax Credit. This tax relief is worth up to $5,000 per employee for 2020 and up to $7,000 per employee per quarter for 2021.
Significant lookback opportunity for PPP borrowers that were previously excluded.
Expanded eligibility for companies with 20% decline in gross receipts. Large employer threshold increased.
Start a new trade or business after February 15, 2020 with <$1 million in average annual gross receipts.
A tax savings scenario
During the pandemic, a small software company created a new version of their product for a different customer base. They qualify for the Employee Retention Tax Credit under the recovery startup provision.
Ways to qualify
Did you have a significant decline in revenue since 2019?
Were you fully or partially shut down by a government order?
Did you start something new after February 15, 2020?
A boutique retail store saw a significant decline in gross receipts in 2020 compared to 2019.
A dental practice was ordered to fully shut down at the beginning of the pandemic.
A restaurant shut down due to government order, then was allowed to provide outdoor dining, followed by indoor dining with capacity restrictions.
A software company developed a new product for their customers in 2021. Average revenue for the past 3 years was under $1M.
A private gym received a PPP loan and saw a significant decline in revenue compared to 2019.
A non-profit organization partially suspended operations due to government order.
The ERTC is a fully refundable payroll tax credit that was enacted as part of the CARES Act in March 2020.
In December 2020, the Consolidated Appropriations Act expanded the ERTC, allowing PPP borrowers to benefit from the ERTC retroactively.
Then in March 2021, the American Rescue Plan Act established the Recovery Startup provision for companies that start a new trade or business after February 15, 2020.
There are three ways to qualify for the ERTC:
- Significant decline in quarterly gross receipts — 20% or more decline in 2021; 50% or more decline in 2020.
- Full or partial government shutdown — hindering more than a nominal portion of your operations; also consider your key vendors.
- Recovery startup — start a new trade or business after February 15, 2020 with average annual revenue < $1 million.
Remember there are three ways to qualify for the Employee Retention Tax Credit. Government shutdown is only one way.
Under the government shutdown criteria, a company can qualify for the ERTC with a full OR a partial shutdown. Examples of partial shutdowns include capacity restrictions and key suppliers that were forced to close. To meet IRS guidelines, more than a nominal portion of business operations must have been affected.
It’s important to note these considerations apply to essential businesses, too.
To be eligible for the Recovery Startup provision of the Employee Retention Tax Credit you must meet these two criteria:
- Your business must have average annual gross receipts of no more than $1,000,000 over the three year period including 2018, 2019, and 2020; and
- You began a new trade or business after February 15, 2020.
A new trade or business can be an entirely new company, or it can be a new trade, product, or service offering within an existing business.
Take our recovery startup quiz to find out if you might qualify.
To claim the ERTC, eligible employers report their total qualified wages on their quarterly employment tax returns (Form 941). Employers can also request an advance of the employee retention credit by submitting Form 7200.
For quarters that are filed timely, include Form 941. For past quarters, file Form 941-X. For companies that use a third-party payroll provider, some coordination with the payroll provider may be necessary.
The IRS has extended the audit window for this tax credit. Documenting your eligibility, qualified wages, and calculation is important.
The IRS has a backlog of ERTC claims so it could take several months to receive your refund check. Companies may choose to receive their money sooner through our advanced funding partner.
Paycheck Protection Program: The PPP is a forgivable loan employers apply for through an approved lender to help cover payroll costs (wages up to $100,000, employee benefits, and state and local taxes). Employers can also use some of the funds (40%) to cover interest on mortgages, rent, utilities, operations expenditures, covered property damage, supplier costs, and worker protection expenditures.
Employee Retention Tax Credit: The ERTC is a fully refundable payroll tax credit that employers claim on their federal employment tax return to help cover employee wages and qualified health plan expenses associated with those wages.
While you can’t double-dip using the same wages for PPP loan forgiveness and the ERTC, you can optimize your claims for both. Some analysis is helpful when deciding what combination of the two makes the most sense. For instance, if your company has flexibility in the PPP forgiveness period, determining the quarters in which it may have qualified for the payroll credit first may be helpful in getting the most benefit from both ERTC and PPP.
No, you do not have to repay the Employee Retention Tax Credit. However, if you receive an advance of the credits (Form 7200), you need to account for that amount when filing your federal employment tax return.
Yes. While the definition of qualified wages is limited for large employers, you can still take advantage of the ERTC if you paid employees that were either not working or were working reduced hours. Depending on the size of your company and the amount of qualified wages paid during the quarter, the ERTC can still be substantial.
For 2020, a large employer is more than 100 employees. For 2021, that threshold was increased to 500 employees.
Yes. Examples of nonprofit organizations that have already taken advantage of the credit are hospitals, schools, museums, performing arts centers, and churches.
Clarus specializes in tax credits like the ERTC. As part of every engagement, we analyze your eligibility for both 2020 and 2021. We optimize your claim and help you remain compliant by preventing double dipping with other tax credit programs. With every calculation we include a formal tax opinion that documents your eligibility and qualified wages.