This blog was provided by Paychex, a premier sponsor of the PICPA.

By Marc Dovi

The Employee Retention Tax Credit (ERTC), a provision of the April 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, was established to help business retain employees despite the massive economic downturn from the COVID-19 pandemic. It had certain parameters when established in the CARES Act, but has been impacted by subsequent legislation. Particularly, the Consolidated Appropriations Act 2021 and the American Rescue Plan Act extended its deadline and expanded eligibility to claim the credit, making it available for businesses to claim until Dec. 31, 2021.

However, depending on whether you took a Paycheck Protection Program (PPP) loan and when you claim the credit, there are different requirements.

What Is the ERTC?

The ERTC is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees.

In the 2020 CARES Act, employers who qualify can claim the credit against 50% of qualified wages paid, up to $10,000 per employee annually for wages paid between March 13 and Dec. 31, 2020. But in the Consolidated Appropriations Act 2021, there was an expansion. Now, employers who qualify can claim a credit against 70% of qualified wages paid. Additionally, the amount of wages that qualifies for the credit is now $10,000 per employee per quarter for the first two quarters of 2021.

Under the American Rescue Plan Act, the credit remains at 70% of qualified wages up to a $10,000 per quarter, with a maximum of $7,000 per employee per quarter for all of 2021. So, an employer could claim $7,000 per quarter per employee, or up to $28,000 for 2021.

Who Qualifies for the ERTC?

Most employers, including colleges, universities, hospitals, and 501(c) organizations, qualify for the credit. Businesses that took a PPP loan also are eligible, including borrowers from the initial round of PPP who originally had been ineligible.

Qualification for eligible employers is determined by one of two factors, and one of these factors must apply in the calendar quarter the employer wishes to use the credit:

• The trade or business was fully or partially suspended or had to reduce business hours due to a government order.
• Employer has had a significant decline in gross receipts.

CARES Act

-  Generally, if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019, an employer would qualify.

Consolidated Appropriations Act 2021

-  Beginning in 2021, businesses must be impacted by forced closures or quarantines or have seen more than a 20% drop in gross receipts in the quarter.*

-  For new businesses, the IRS allows the use of gross receipts for the quarter in which it started as a business as a reference for any quarter for which there are no 2019 figures.

American Rescue Plan Act

-  In addition to eligibility requirements under the Consolidated Appropriations Act 2021, businesses also have the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter.*

*Compared to the same quarter in 2019

Which Wages Qualify for the Calculation?

When calculating the employee retention tax credit, one would generally use wages/compensation subject to FICA taxes, as well as qualified health expenses. These must have been paid after March 12, 2020, and qualify for the credit if paid through Dec. 31, 2021.

Remember, the credit can only be taken on wages that are not forgiven or not expected to be forgiven under PPP.

The CARES Act stated that those who have more than 100 full-time employees can only use the qualified wages of employees who are not providing services because of suspension or decline in business. Furthermore, any wages paid for vacation, sick days, or other days off based on the employer’s current policy cannot be included in qualified wages for the larger employers.

The Consolidated Appropriations Act 2021 increased the employee number for determining which wages are applicable for the credit to 500 full-time employees. The American Rescue Plan Act allows certain hard-hit businesses (gross receipts in a quarter are less than 10% of what they were in comparable quarter in 2019 or 2020) to claim the credit against all employees’ qualified wages.

How Do the Credits Work?

The American Rescue Plan Act stipulates that the nonrefundable pieces of the ERTC will be claimed against Medicare taxes instead of against Social Security taxes as they were in 2020. This change, however, only applies to wages paid after June 30, 2021, and will not change the total credit amount. At the end of the quarter, the amounts of these credits will be reconciled on the employer’s Form 941.

For more details, read the ERTC article in the Paychex Knowledge Center.

Marc Dovi is a marketing content program manager for Paychex in Rochester, New York.

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