What is it?

The ERTC is a refundable tax credit that rewards businesses up to $26,000 per employee.

The ERTC was designed to reward and encourage businesses to keep their employees on payroll. It has been dramatically expanded to provide more financial relief to a larger group of employers.

Employers can take advantage of the ERTC against federal employment taxes via qualified wages paid to their employees from March 13, 2020 to December 31, 2021. Businesses can retroactively claim the credit against past quarters.

The ERTC has a maximum credit of $5,000 per employee in 2020, and a maximum of $21,000 per employee in 2021.

Updated November 2021: The Infrastructure Investment and Jobs Act reduced the active period for the ERTC, removing Q4 2021. This change brings the total value of the credit to a maximum of $26,000 per employee on payroll across tax years 2020 and 2021. However, Recovery Startup Businesses are an exception to the change, and may still be eligible for Q4 2021 under certain circumstances. We strongly recommend you consult with a professional accountant to maximize the value of your tax credit.

 

Who’s eligible?

Private businesses or tax-exempt organizations that conduct a trade or business that experience one or both of the following criteria:

• The business was forced to partially or fully suspend or limit operations by a federal, state or local governmental order

• The business experienced a 50% decline in gross receipts during any quarter of 2020 versus the same quarter in 2019, and/or a 20% decline in gross receipts 2021 against the same quarter in 2019.

Note: if your business started in 2020, you will use 2020 as your comparison period when applying for the tax credit in 2021.

The ERTC is available to businesses of all sizes – there is no cap on employees, although it is easier for small businesses to take advantage.
 

How to claim the credit

To claim the credit retroactively, file a Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return

• The IRS allows a period of limitation of up to three years after the initial date of filing during which a business may file a Form 941-X to adjust previous filings. 

To claim the credit currently, file a Form 941, Employer’s Quarterly Federal Tax Return

To claim the credit in advance, file a Form 7200, Advance Payment of Employer Credits Due to COVID-19

 

How to calculate the credit

We strongly recommend that you speak with a CPA.

Step 1 – determine what quarters of 2020 and 2021 your business qualifies for the ERTC

Was your business ordered by the government to partially or fully suspend operations; or

Did your business experience a drop in gross receipts of at least 50% (2020) or 20% (2021) versus the same quarter in 2019?

Note: if your business started in 2020, you will use 2020 as your comparison period when applying for the tax credit in 2021. 

Step 2 – determine the total qualified wages, including allocable qualified health plan expenses, paid to each employee per quarter. Do not include wages that have been used toward PPP forgiveness.

Step 3 – calculate qualified wages paid to each employee in 2020, apply a cap of $10,000 of qualified wages per employee across all quarters combined. Multiply the qualified wages up to the annual cap by 50% to determine your credit amount for 2020. The maximum is $5,000 per employee for the entire year.

Step 4 – calculate qualified wages paid to each employee in Q1, Q2 and Q3 in 2021, apply a cap of $10,000 of qualified wages per employee per individual quarter. Multiply the qualified wages up to the quarterly cap by 70% to determine your credit for each quarter in 2021. The maximum is $7,000 per employee per quarter.

 

Frequently Asked Questions

✺ What if my business received a PPP loan?

• You may still be eligible for the ERTC.

• Note that you cannot use wages applied to the ERTC toward the forgiveness of a PPP loan. Consider applying non-payroll expenses toward your PPP forgiveness application so that you may maximize the benefit of both PPP forgiveness and the ERTC. 

✺ Can I use qualified wages applied to the ERTC for other federal tax credits?

• A business may not “double benefit” by utilizing the same wages for claiming the ERTC and:

• Families First Coronavirus Response Act (FFCRA)

• American Rescue Plan Act of 2021 Leave Credits

• Work Opportunity Tax Credit (WOTC)

• Research and Development Credit (R&D)

• Forgiveness on a PPP loan

✺ What if I started my business during the pandemic?

• Your business may still qualify under the traditional rules. However, if your business started in 2020, you will use 2020 as your comparison period when applying for the tax credit in 2021. You may also apply the suspension of operations qualifier as appropriate. 

• The March 2021 American Rescue Plan also expanded the ERC so that a business that was launched after February 15, 2020 and does not qualify under the standard rules may still apply for the ERTC under the special “Recovery Startup Business” qualifying criteria. 

• Instead, recovery startup businesses cannot exceed average annual gross receipts of $1 million, and the total ERTC value is capped at $50,000 per quarter. Additionally, the Recovery Startup Business qualifier is only eligible for Q3 and Q4 of 2021.

 

Terms and Definitions

✺ Qualified wages

Includes all forms of wages that are subject to FICA taxes (taxes withheld from paychecks to fund Social Security and Medicare). Additionally, qualified wages may include the employer’s health plan expenses properly allocable to the wages.

Note that there are certain employees that should not be considered for qualified wages under most circumstances, including:

• An individual who owns more than 50 percent of the business

• A grantor, beneficiary, or fiduciary of the employer

• A family relative of the employer (if the employer is an individual), as well as spouses or household employees.

The IRS has also clarified that tips may be considered qualified wages for the purposes of ERTC, as long as they are Medicare wages.
 

✺ Full-Time Employees

Employees that work 30 hours or more in a week or 130 hours or more in a month.
 

✺ ERTC rules for large businesses vs. small businesses

The ERTC eligibility rules are different in 2020 and 2021.

• In 2020, businesses with 100 or fewer full-time employees may include qualified wages for all employees when calculating the credit. If a business had more than 100 employees in 2019, they can only include qualified wages paid to an employee during a period where that employee was not providing services to the business but was still receiving qualified wages.

• In 2021, that threshold is raised to 500 or more full-time employees.
   

✺ ERTC eligibility for full or partial suspension of operations

A government body ordered your business to either cease all operations, or continue with some, but not all of normal operations.

A partial suspension means that a “more than nominal” portion of business operations were suspended by a government order. For example, if a restaurant is ordered to cease indoor dining in Q2 of 2020, it may achieve eligibility through this provision if:

• Indoor dining accounted for at least 10% of the business’ revenue during the corresponding quarter in 2019, in this case, Q2 2019; or

• Indoor dining accounted for at least 10% of the business’ personnel hours during the corresponding quarter in 2019.

Note that full or partial suspension relates to how a business conducts their activities, not its revenue. A business can be eligible for the ERTC under this provision even if their revenue increased during the applicable quarter. 

Unlike the gross receipts eligibility, the suspension of operations provision only applies during the time when your business is affected by the government order in question. In other words, your business may only be eligible for a partial quarter under this provision. 

IRS Notice N2021-20 provides significant detail on what constitutes a full or partial suspension of operations. Businesses should consult that document to make an informed determination, paying special attention to FAQs #17 and #18.