As the global pandemic’s economic toll reverberated through countless businesses, it became evident that many hard-hit entities initially needed to meet the eligibility criteria for the Employee Retention Tax Credit (ERTC). In response, subsequent legislative acts broadened the program’s scope, enabling more small businesses to leverage this valuable tax credit.
This comprehensive article delves into the intricacies of ERTC eligibility, including the qualifications for employers, legislative changes, and how to determine which wages are eligible. Additionally, it clarifies interactions with other credits and funding sources, shedding light on the nuances of this crucial economic relief measure.
ERC Qualifications for Employers
The Employee Retention Credit is an essential lifeline for businesses navigating the turbulent waters of the COVID-19 pandemic. The qualifications for employers evolved significantly with legislative changes. Here’s an overview of the essential eligibility criteria:
1. Trade or Business Suspension or Reduced Hours
- The ERTC applies to businesses that were fully or partially suspended or had to reduce business hours due to government orders.
- It’s important to note that the credit covers only the period during which a business is suspended, not the entire quarter. As per IRS guidance, some businesses may need to meet this factor test.
- Unless their supply of critical materials or goods was disrupted, certain essential businesses continued their operations and might not meet this test. However, they can still qualify through the second factor.
2. Significant Decline in Gross Receipts
- An employer can qualify for the ERTC if they experience a significant decline in gross receipts.
- The IRS introduced a safe harbour in August 2021, excluding forgiven PPP loan amounts, Shuttered Venue Operators Grants, or Restaurant Revitalization Fund grants from gross receipts for ERTC eligibility calculations. Consistency in applying this safe harbour across all entities is crucial.
ERTC Evolution Through Legislation
Each legislative act played a pivotal role in expanding ERTC eligibility and refining its criteria:
CARES Act – 2020
- Initially, businesses with a calendar quarter’s gross receipts below 50% of the same quarter in 2019 were eligible.
- Businesses only qualified if their gross receipts were at least 80% compared to the same quarter in 2019 in the following quarter.
Consolidated Appropriations Act, 2021
- Starting in 2021, businesses needed to demonstrate either a government-mandated closure or quarantine or a more than 20% drop in gross receipts for a quarter compared to the same quarter in 2019.
- New businesses were allowed to use their first quarter of operation as a reference when 2019 figures were unavailable.
American Rescue Plan Act – 2021
In addition to the criteria under the Consolidated Appropriations Act of 2021, businesses could also assess eligibility based on the preceding calendar quarter compared to 2019.
3. Recovery Startup Business (American Rescue Plan Act – 2021)
- Introduced a new category for the third and fourth quarters of 2021.
- Businesses could be entitled to up to $50,000 per quarter if they:
- Commenced operations after February 15, 2020.
- Had annual gross receipts not exceeding $1 million.
- Were not eligible under the other two categories.
- Eligibility was assessed quarterly, providing flexibility.
- Interaction with Other Credits and Funding Sources
Navigating the intricacies of multiple relief programs and credits can be challenging. Here’s how ERTC interacts with other funding sources:
- There’s no double-dipping for credits. Employers cannot claim both the Employee Retention Credit and the credit for paid family medical leave on the same qualified wages.
- Employees who qualify for the Work Opportunity Tax Credit may not be included for the Employee Retention Credit.
- ERTC can only be applied to wages that are not forgiven or expected to be forgiven under the Paycheck Protection Program (PPP).
Tipped Wages and Qualified Wages
Clarifications were made regarding tipped wages and qualified wages. Tipped wages qualify if they are subject to FICA taxes. Tips exceeding $20 in a calendar month for an employee are included in qualified wages, with the first $20 also counting. Tips below $20 per month do not qualify.
Owner/Spouse Wages and Qualified Wages
Attribution rules apply to determine whether owner or spouse wages can be included in the ERTC. If these individuals are considered majority owners, their wages are not qualified for ERTC. These rules apply across all quarters, and corrections may be necessary if wages were previously miscategorized.
PEO/CPEO and Reconciliation
Businesses using a Professional Employer Organization (PEO) or Certified Professional Employer Organization (CPEO) must reconcile their ERTC information. The credit is reported on the PEO/CPEO aggregate Form 941 and Schedule R.
Wrapping Up
The Employee Retention Tax Credit (ERTC) is a vital lifeline for businesses, offering a refundable credit that extends to qualified wages, including specific health insurance costs, paid to employees. The transformative legislative acts passed between March 2020 and November 2021 played a pivotal role in reshaping the ERTC landscape. These laws introduced expansions and contractions, along with nuanced changes in eligibility and other crucial details related to this invaluable tax credit. As businesses adapt to evolving economic landscapes, staying abreast of ERTC regulations and seeking guidance from accounting professionals and payroll specialists will be essential in harnessing its full financial stability and recovery potential.
Furthermore, the Employee Retention Tax Credit (ERTC) operates as a refundable tax credit grounded in the payroll taxes your business has contributed. While the tumultuous events of the pandemic ushered in new legislative changes, it’s crucial to note that these alterations did not impact the core value of the credit itself. In any calendar quarter, if the ERTC surpasses the employer’s total liability, be it the portion of Social Security or Medicare, depending on whether before June 30, 2021 or after, any surplus amount is promptly refunded to the employer. This mechanism ensures businesses can effectively leverage the credit to bolster their financial stability during challenging times.
As businesses continue to grapple with the challenges posed by the pandemic, the ERTC remains a valuable tool to support their recovery efforts. By staying informed and working closely with accountants and payroll specialists, businesses can tap into this vital resource and secure the financial stability needed to thrive in a post-pandemic world.
Solutions by Mike Miller, CPA 