Making Sense of the Employee Retention Tax Credit

by Megan Hiles
Two Women Managing Flower Shop

Blog updated December 2021. Additional information added to the end of the post.

The American Rescue Plan Act signed into law March 11, 2021 extended and expanded the employee retention tax credit to December 31, 2021 to eligible employers who retained employees during the COVID-19 pandemic.

What is the Employee Retention Tax Credit?

The employee retention tax credit is a refundable tax credit that employers can claim based on qualified wages, including certain health insurance costs, they paid to employees.

Who Qualifies for the Employee Retention Tax Credit?

Qualifying standards have changed over the months (see below), but as a baseline, qualification is determined by one of two factors. One of these factors must apply to the calendar quarter the employer would like to claim the credit:

  1. A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business was suspended, not the entire quarter.

Based on IRS guidance, some businesses do not meet this first factor and would not qualify.

Businesses that are considered essential, unless they have their supply of critical materials/goods disrupted in a way that negatively affected their ability to continue to operate and businesses closed, but still able to continue operations mostly intact through telework still may qualify if they experience the second factor:

  1. An employer that has a significant decline in gross receipts in 2020 or 2021 compared to the same quarter in 2019.

What Wages Qualify for the Employee Retention Tax Credit?

Generally, wages that are subject to FICA taxes and qualified health expenses can be included when an employer calculates the employee retention credit. These wages must have been paid after March 12, 2020 and, now through to December 31, 2021. Depending on the circumstances, the IRS has multiple ways to calculate qualified health expenses.

To start determining the qualified wages that can be claimed, and employers needs to determine how many full-time employees they have. For the employee retention credit, a full-time employee is any employee who worked at least 30 hours per week or 130 hours in a month in any calendar month of 2019.

The employee retention credit cannot be claimed for wages that are expected to be forgiven under a Paycheck Protection Plan loan or other Covid-relief programs

Again, there have been changes in the qualifying wages in the last year, so please see below for more details.

Changes in the Employee Retention Tax Credit

Over the past fourteen months, the employee retention tax credit has undergone a number of changes since it was initially introduced. The most current information is in the Current Employee Retention Tax Credit Standards: American Rescue Plan Act – March 2021 section below, but we recommend reading everything below to understand the full picture of the employee retention tax credit.

CARES Act – March 2020

The employee retention tax credit was initially introduced in the Coronavirus Aid, Relief and Economic Security (CARES) Act on March 27, 2020. At that time, eligible employers could claim 50% of qualified wages paid, up to $10,000 per employee for the calendar year 2020. Employers who accepted Paycheck Protection Plan loans were still eligible for the employee retention tax credit.

To qualify in 2020, an employer’s gross receipts in a calendar quarter needed to be below 50% of gross receipts compared to the same calendar quarter in 2019. However, if the quarter immediately following the quarter with the over 50% loss has gross receipts that are over 80% of the comparable 2019 calendar quarter, the employer is no longer eligible.

Employers with more than 100 full-time employees can only claim the ERTC against the qualified wages of those employees not providing services because of business suspension or decline in business.  Wages paid for vacation, sick or other paid time off based on the employer’s current policy cannot be included. Employers with 100 or fewer full-time employees can claim all employee wages, including those who are working, as well as paid time off, except for paid leave under the Families First Coronavirus Response Act.

Consolidated Appropriations Act – December 2020

When the Consolidated Appropriations Act passed December 27, 2020, it expanded the ERTC to allow eligible employers to claim 70% of qualified wages paid. Additionally, employers could claim a refundable tax credit against the employer share of the Social Security tax. The $10,000 of wages claim limit per employee was expanded from per year to per calendar quarter for 2021. The maximum ERTC credit amount is $7,000 per employee per calendar quarter.

To qualify beginning in January 2021, businesses must have seen more than a 20% loss in gross receipts when comparing calendar quarters in 2021 to 2019 and been negatively impacted by forced closures or quarantines. New businesses are permitted to use gross receipts in the quarter when they started the business as a reference for any quarter where they don’t have 2019 number, since they didn’t exist then.

The standards for qualifying wages remained largely the same from the CARES Act, with the notable increase to the limit of employees to 500 for determining what wages are applicable to claim.

Current Employee Retention Tax Credit Standards: American Rescue Plan Act – March 2021

Here is where the ERTC stands today, after the American Rescue Plan Act was signed into law March 11, 2021:

  • Extended to December 31, 2021, making employers eligible for four calendar quarters instead of two
  • 70% credit for qualified wages
  • $10,000 maximum wages per employee per calendar quarter
  • $7,000 maximum credit per employee per calendar quarter
  • Expanded the categories of employers that may be eligible to claim the credit. Colleges, universities and entities that provide hospital or medical care and 501(c) organizations are now potentially eligible for the credit.
  • Businesses started after February 15, 2020 that were forced to shut down due to government order may be eligible of a credit up to $50,000 per quarter
  • Employers who accepted one or two PPP loans are eligible for the ERTC but may not use wages allocated for PPP for the ERTC
  • All eligibility requirements under the Consolidated Appropriations Act still apply
  • Employers now also have the option of using gross receipts in the immediately preceding calendar quarter when they are comparing to 2020 calendar quarters
  • There is no “double-dipping” credit. If qualified wages were claimed for paid family medical leave, they cannot be claimed again for the ERTC
  • If an employee is claimed for the Work Opportunity Tax Credit, they cannot be claimed for the ERTC

August 2021 Updates:

The IRS issued additional guidance for the Employee Retention Tax Credit in August 2021:

  • The definition of a severely financially distressed employer is a business that experienced a more than 90% decline in current quarter gross receipts compared to the same quarter in 2019
  • The definition of an eligible employer has expanded to include recovery startup businesses and severely distressed organizations
    • If an organization began after February 15, 2020 and in the preceding three years had less than $1 million in gross receipts, it may claim the credit in Q3 and Q4 for up to $50,000 each, regardless if it meets the other tests. If it meets the other two tests, the $50,000 limitation does not apply
  • Employers with over 500 full-time employees in 2019 are limited to claiming the ERTC for wages paid to employees not performing services
    • However, if the large employers qualifies as severely financially distressed, all wages paid to employees are eligible to be qualified wages
  • Tips can be considered as eligible wags so long as they are Medicare wages
  • Using the same tip wages for both the tip credit and Employee Retention Tax Credit is permitted
  • Indirect or attributed ownership must be considered when determining if an owner’s wages may be included in claiming the credit
    • Any time an owner or owner’s spouse has an identified relationship to someone who is considered greater than 50% (independently or by attribution), they may not include their own wages in claiming the credit
  • If the ERTC is claimed for 2020 wages, the 2020 wage expense must be reduced by the credit amount
    • If you’ve already filed your 2020 return, you may need to amend it
  • If the ERTC is claimed for 2021 wages, the 2021 wage expense must be reduced by the credit amount

November 2021 Update:

The US House of Representatives passed the Infrastructure Investment and Jobs Act (IIJA) November 5, 2021, thus ending the Employee Retention Tax credit as of September 30, 2021. Businesses may not claim the credit after Q3 of 2021.

It is important to note that if your business has experienced a partial or full shutdown due to disruptions in the supply chain, you may qualify for the ERTC in any eligible quarter. If your business did not receive supplies critical to keep the business running, this may fall under the full or partial suspension of operations provision in the ERTC.

The IRS included this example in their guidance:

Employer A operates an auto parts manufacturing business. Employer A’s supplier of raw materials is required to fully suspend its operations due to a governmental order. Employer A is unable to procure these raw materials from an alternate supplier. As a consequence of the suspension of Employer A’s supplier, Employer A is not able to perform its operations for a period of time. Under these facts and circumstances, Employer A would be considered an eligible employer during this period because its operations have been suspended due to the governmental order that suspended operations of its supplier.

This example shows how a business may qualify for a partial shutdown even if their operations never technically ceased. This is also a situation where defining “nominal” is not clear as it is difficult to apply the 10% rule with supplier delays. Since there is a lot of gray area when applying the ERTC standards, it’s valuable to check out many of the examples provided in Notice 2021-20.

December 2021 Update:

With the passing of the Infrastructure Investment and Jobs Act November 15, 2021, the IRS issued additional guidance for employers regarding the retroactive termination of the Employee Retention Tax Credit.

Employers who received advanced payments for fourth quarter wages of 2021 and are not a recovery startup business must repay those amounts. If these amounts are repaid before the due date of the business’ applicable tax returns, generally, the business will not pay any penalties.

 Employers who are not startup recovery business and reduced deposits on or before December 20, 2021 for wages paid during the fourth quarter of 2021 will not be subject to a failure to deposit penalty is they meet the following criteria:

  • The employer reduced deposits in anticipation of the Employee Retention Credit, consistent with the rules in Notice 2021-24
  • The employer deposits the amounts initially retained in anticipation of the Employee Retention Credit on or before the relevant due date for wages paid on December 31, 2021 (regardless of whether the employer actually pays wages on that date). Deposit due dates will vary based on the deposit schedule of the employer, and
  • The employer reports the tax liability resulting from the termination of the employer’s Employee Retention Credit on the applicable employment tax return or schedule that includes the period from October 1, 2021, through December 31, 2021. Employers should refer to the instructions to the applicable employment tax return or schedule for additional information on how to report the tax liability.

Failure to deposit penalties will not be waived after December 20, 2021 for businesses that are not recovery startups.

What Are My Next Steps?

The Corrigan Krause Coronavirus Crisis Team (CKCCT) remains available to help walk you through the sometimes complex and confusing employee retention tax credit. Please reach out to Tommy Sustar at thomas@corrigankrause.com or info@corrigankrause.com any time to get the help you need to ensure you receive the tax credits you’re entitled to.

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