Nov 15, 2021
Don’t leave ERTC money on the table!
The Employee Retention Tax Credit (ERTC) is a provision established under the CARES Act which has been enhanced by additional legislation and could provide an immense amount of capital to employers. Unfortunately, statistics are showing the credit is being underutilized. The good news is with year-end planning on the horizon, now is the perfect time to leverage the ERTC.
What is the ERTC?
This is a refundable tax credit employers can claim against certain employment taxes, equal to a percentage of qualified wages and health insurance premiums paid after March 12, 2020, and before September 30, 2021.
For 2020, the credit is 50% of qualified payments, up to $10,000 per employee. Simply put, an eligible business has the potential to request refunds of up to $5,000 per employee for the year.
For 2021, the credit increases to 70% of qualified payments, up to $10,000 per employee per quarter. The credit was intended to run through December 31, 2021, but the passing of the recent Infrastructure Bill put an end to it after September 30. Nevertheless, the credit is still fair game for the first three quarters of 2021. With a maximum credit of $7,000 per employee, per quarter, a business eligible for all three quarters of 2021, could receive refunds of $21,000 per employee. Without question, the ERTC can provide much-needed dollars for eligible employers.
How do I know if my business is eligible?
For most businesses, eligibility is determined by meeting one of two tests; with a third test available for quarters 3 and 4 of 2021, which will be outlined later.
- TEST #1 – A measure of decline in gross receipts. If an employer experiences a significant decline in gross receipts for any calendar quarter, as compared to the same calendar quarter in 2019, they will be eligible for the credit in that quarter. For 2020, this is defined as gross receipts that are less than 50% of gross receipts for the same quarter in 2019, and for 2021, this is gross receipts being less than 80% of gross receipts for the same quarter in 2019.
- TEST #2 – A full or partial suspension of operations. If an employer was subject to any full or partial suspension of operations because of government orders related to COVID-19 they could be eligible. These orders could be Federal, State, county, and/or municipality. Even if your business was deemed essential and was not directly affected by such orders, there still could be avenues to be eligible for the credit.
- TEST #3 – Under a third test, if a business can meet the definition of a recovery startup business, they can claim the credits for the 3rd and 4th quarters of 2021 only (not exceeding $50,000 per quarter). A recovery startup business is any employer that began a trade or business after February 15, 2020, and has average annual gross receipts of less than $1,000,000.
What are some important details to keep in mind?
- First, gross receipts are determined based on the method used for the employer’s tax return. Meaning, if your business uses the cash method for tax purposes, then gross receipts for Test #1 should be calculated using the cash method, even if your financial statements use the accrual method. This could be beneficial for businesses, especially during times when the pandemic was hitting the hardest and collections slowed.
- Another important item to keep in mind is that, for this credit, employers are considered either small or large. For 2020, a small employer is one that, based on 2019 counts, averaged 100 or fewer full-time employees. For 2021, this number increases to an average of 500 or fewer full-time employees, still based on 2019 counts. If a business is above these amounts, they are considered large. Small employer status is more advantageous because it allows qualified wages to include all wages paid. If a business is considered a large employer, qualified wages are limited to wages paid to an employee only for the time that employee was not providing services. For example, if your business is a large employer and operations were partially suspended, but all your employees continued working during that time, your business may not be able to claim any credits on the wages paid during that suspension period. For this purpose, a full-time employee is an employee that, in 2019, averaged at least 30 hours per week or 130 hours per month. As an example, an employer in 2019 who had 5 employees that worked 25 hours per week and 5 employees that worked 30 hours a week, would only be considered to have 5 full-time employees. Early on, a common misconception was that full-time employees were equal to full-time equivalents, which may have caused some businesses to think they were large employers, when in fact that may not be the case.
- Finally, there are several different paths a business could take to qualify for the ERTC based on a full or partial suspension of operations due to governmental orders. As previously mentioned, even if your business was not directly affected by the orders, there still could be ways to qualify for the credit. We encourage you not to overlook this test as it could be very beneficial to revisit.
What are my next steps?
With year-end planning season looming, your William Vaughan Company advisor will surely be discussing this topic with you in the coming weeks. If you are not currently a client, but this topic has piqued your interest and you would like us to look at how this credit might benefit your business, please do not hesitate to reach out to us. As mentioned, the credit has been generally underutilized, so we would love to help your business realize the greatest benefits it can.
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Mike Hanf, CPA, CGMA
Categories: Tax Planning
Jan 06, 2021
Prior to the passage of the Consolidated Appropriations Act, 2021, (CAA), the Employee Retention Tax Credit (ERTC) was as afterthought reserved to the deepest recesses of most employers’ minds as in the original CARES Act, taking a PPP loan and requesting subsequent forgiveness of that loan precluded businesses from also taking the ERTC. At best, the ERTC was a backup option for businesses that failed to request a PPP loan on time or had too many employees for the PPP loan. Now, however, with the passage of the Consolidated Appropriations Act, 2021 just days ago, the ERTC is retroactively available to employers even if they took a PPP loan.
The ERTC is a refundable payroll tax credit that can be taken against employment taxes equal to 50 percent of the qualified wages an employer pays to employees after March 12, 2020, and through December 31, 2020.
This post dives into the details of the ERTC and the mechanics of how employers can capitalize on this additional benefit.
The ERTC for 2020
As noted above, employers that borrowed a PPP loan can now also claim the ERTC for 2020 but not on the same dollars of payroll costs. What this means is wages and health care costs used in calculating the ERTC cannot also be used in deriving PPP loan forgiveness. Simply put, there’s no double-dipping. In order the qualify for the ERTC an employer must satisfy one of the following conditions:
- Full or partial suspension of business operations during any calendar quarter due to government orders limiting commerce, travel, or group meetings as a result of COVID-19 (this does not include individuals business choices or simple advisories by public officials), OR
- A significant (>50%) decline in gross receipts in a 2020 calendar quarter in relation to the same quarter in 2019.
If the significant gross receipts decline qualification is met, every quarter thereafter is considered a qualifying quarter until the first day of a calendar quarter following a quarter in which gross receipts returned to at least 80% of the gross receipts in the same quarter during 2019.
Example: Gross receipts for 2020 are $100,000, $150,000, $100,000, and $120,000 for Q1, Q2, Q3, and Q4 of 2019 respectively. Gross receipts are $45,000, $112,500, $83,000, and $90,000 for Q1, Q2, Q3, and Q4 of 2020 respectively. The employer would qualify for the ERTC beginning in quarter one since gross receipts decreased 55%. Quarter four would not be a qualified quarter since gross receipts rose back to 83% of the prior year’s receipts during the 3rd quarter.
If a business began in the middle of a quarter, gross receipts would be extrapolated to estimate the total quarter’s receipts. For example, if a business began on June 1st and reported $50,000 in gross receipts for the month, the business would use $150,000 of gross receipts for the 2nd quarter of 2019 ($50,000 x 3 months). Extrapolated gross receipts would be used for any prior quarter in 2019.
Once an employer has determined they qualify under one of the stipulations above, the next step is to determine on which wages to calculate the credit. First, in the event that a business is fully or partially suspended, only wages paid during the period of suspension can be used in calculating the ERTC. If the business qualifies based on the gross receipts test, the wages from each qualifying quarter can be used. The number of average monthly full-time employees (FTEs) significantly affects what wages can be used under either qualifying event. If the employer had less than or equal to 100 average monthly (FTEs) in 2019, then all wages paid to all employees during the eligible time period can give rise to a credit. If however, the employer had greater than 100 average monthly FTEs in 2019, only wages paid to employees during the eligible time period to NOT WORK are eligible for the credit. For purposes of this rule, and FTE is an employee who, for any calendar month in 2019, had an average of at least 30 hours of service per week or 130 for the month. This is not a fractional calculation. All employees working less than 30 hours count as zero FTEs in the average monthly calculation.
After considering all of the qualifications, the calculation of the credit is pretty straightforward. The ERTC is 50% of up to $10,000 of wages, including certain health insurance costs per employee per year. Let’s look at a simple example.
As seen in the table above, Jed’s quarter 3 wages are limited to $1,000 since $9,000 of his wages were already accumulated in quarters 1 and 2. Likewise, Jack’s wages are limited beginning in the second quarter and none of his wages are eligible in quarter 3.
One caveat to keep in mind when running the numbers on this credit is that wages up to the amount of the credit are not allowed as a deduction on the employer’s income tax return. So if an employer claims a $5,000 credit on $10,000 of wages, $5,000 of those wages are non-deductible for tax purposes.
As for businesses with multiple entities or subsidiaries, the following aggregation rules apply:
- if ONE business in the group has been partially or fully suspended, then all businesses in the group are considered to have been partially or fully suspended
- when calculating the percentage decline in gross receipts quarter over quarter, the gross receipts of ALL aggregated businesses must be taken into account
- when determining FTEs for purposes of the 100 FTE threshold, employees from all of the businesses in the group must be added together
Finally, in order to claim this credit, the employer can use one of two approaches. First, employers will report their total qualified wages and related health insurance costs for each quarter on their quarterly payroll tax returns (Form 941 for most employers). The credit is then taken against amounts that would have otherwise been deposited including federal income tax withheld, the employer’s share of Social Security and Medicare tax, and the employees’ share of Social Security and Medicare tax. The second acceptable method is to request an advance of the ERTC by submitting Form 7200.
OK – intermission. Stand up, stretch, use the restroom, and refill your coffee. We made it through the 2020 provisions of the Employee Retention Tax Credit. Next, we are going to breeze through the extension of the ERTC into 2021 provided by the Consolidated Appropriations Act, 2021. Here we go…
Changes for the 2021 ERTC Program
Congress voted to extend the ERTC into 2021 with the program set to end on June 30, 2021. The credit percentage has been increased from 50% to 70% and it is now calculated on $10,000 of wages per employee per quarter. In addition, the FTE threshold is up to 500 FTEs vs. 100 in 2020 and, what is considered a significant reduction in gross receipts quarter over quarter is down from greater than 50% to greater than 20%. Furthermore, congress tossed up a softball by including the provision that, when considering gross receipts for the first quarter of 2021, the employer can elect to compare Q4 of 2020 vs. Q4 of 2019 instead of Q1 of 2021 vs. Q1 of 2019 in the event that there’s a benefit to doing so.
One additional rule put in place for 2021 is that the advance credit claimed via Form 7200 cannot exceed 70% of the average quarterly wages paid in 2019.
As can be expected, the various allocations and calculations possible under the multitude of possible scenarios are far too comprehensive to include in the overview of this blog. When considering the ERTC for your business, do not hesitate to reach out to a William Vaughan adviser for assistance on maximizing the benefits of this program.
By: Jon Floering, CPA