Explained: Employee Retention Tax Credit
Recently expanded and extended, the Employee Retention Tax Credit (ERTC) is a refundable tax credit that encourages businesses to keep employees on their payroll. It’s worth up to $5,000 per employee in 2020 and up to $7,000 per employee per quarter in 2021. As well, under the recovery startup provision, small businesses can claim up to $100,000 in Q3/Q4 of 2021.
How to Qualify for the Employee Retention Tax Credit
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 operations; also consider key vendors
- Recovery startup — start a new trade or business after February 15, 2020 with average annual revenue < $1 million
Since the government expanded this program, it’s important to realize that businesses may now retroactively claim the ERTC in addition to the Paycheck Protection Program loan. If a business was affected by a government-ordered shutdown or had at least a 50% decline in quarterly gross receipts, this creates a compelling lookback opportunity for 2020.
The 2021 threshold for ERTC is even more accessible. A business can now qualify if they had a 20% decline in gross receipts in 2021 compared to the same quarter in 2019.
Particularly impactful for some small businesses is the recovery startup opportunity, where the ERTC can be claimed if they:
- Began a new trade or business after February 15, 2020, and
- Have average annual gross receipts of no more than $1 million for 2018-2020.
Value of the Employee Retention Tax Credit
- For 2020: up to $5,000 per employee, per year
- For 2021: up to $7,000 per employee, per quarter
- For recovery startup: capped at $100,000 claimed in Q3/Q4 2021
Key Considerations and Complexities
- Double dipping: Cannot claim multiple tax credits (e.g., PPP, WOTC, R&D, etc.) with the same wages
- Recovery startup: Begin your new trade or business before June 30, 2021 in order to optimize value in Q3 and Q4 of 2021
- Substantiation requirements: Extended audit window for ERTC claims
- Period eligibility: Differences in eligibility and calculation from 2020 to 2021
- How to count employees: Full-time employees, not full-time equivalents
Examples of Qualified Companies
|Full or partial shutdown||Recovery startup|
|A research company’s computer modeling operations were conducted remotely while the laboratory-based research operations were partially suspended. Lab workers could only perform administrative tasks during the closure.||A software company with less than $1 million in revenue created a new version of their product for a different customer base.|
|A manufacturing company’s significant supplier was forced to shut down by their governor.||A plumbing contractor hired an employee to begin a new sewer and drain cleaning offering. The new service required additional training and specialty equipment.|
It is important to safeguard access to these tax credits. Our team at Clarus R+D can verify your eligibility, optimize your credit, and deliver documentation to support your claim.