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The ERTC was designed to help small businesses that lost revenue due to the pandemic, but businesses must meet certain specific criteria. — Getty Images/martin-dm

In March 2020, Congress created the Employee Retention Tax Credit (ERTC) as a way to provide small businesses with financial relief during the pandemic. Since that time, the ERTC has been expanded twice so more struggling companies can use it to cut down their federal tax bill.

Here’s what you need to know about the ERTC and how to take advantage of it.

What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERTC) is a credit that provides tax relief for companies that lost revenue in 2020 and 2021 due to COVID-19. Eligible companies can receive as much as $7,000 per employee per quarter for four quarters in 2021, which equals $28,000 per employee potentially coming back to your company. They might also qualify for a break of $5,000 per employee for all of 2020.

The ERTC has changed over time, so it can be a little confusing to track where things stand today. When the CARES Act was passed in March 2020, it included the ERTC as an option for financial relief for businesses. But companies could only take a forgivable Paycheck Protection Program (PPP) loan or the ERTC in the original bill, which meant only a handful of them actually could use the credit.

Congress then amended the ERTC in December 2020 in the Coronavirus Response and Relief Supplemental Appropriations Act (CRRSAA), and then in March 2021 in the American Rescue Plan Act (ARPA), so more companies could take advantage of the credit.

One neat thing for eligible employers that have fewer than 500 full-time employees is they can also request advance payment of the ERTC using IRS Form 7200.

What companies qualify for the ERTC?

The ERTC was designed to help small businesses that lost revenue due to the pandemic, but only some companies are eligible. To qualify, companies must meet the following criteria:

  • Your business was ordered by a local government to fully or partially shut down; or
  • Your gross receipts for a single quarter of 2020 fell by 50% versus the same quarter of 2019 (for the 2020 tax credit), or gross receipts for a single quarter of 2021 decreased by 20% versus the same quarter of 2019 (for the 2021 tax credit). If your company was not in business in 2019, you could use a corresponding quarter in 2020 to show you had a revenue reduction between 2020 and 2021 and qualify for the ERTC.

Notably, government entities and sole proprietors are not eligible for the ERTC. If a self-employed person employs people, however, they may qualify for the ERTC for wages paid to the other employees.

How to calculate the size of your ERTC

Eligible companies can claim a refundable credit against what they typically pay in Social Security tax on “qualified wages.” As of January 2021, qualified wages for employers with fewer than 500 employees are those paid to employees during which there was a full or partial shutdown or a quarter that had a decline in gross receipts.

For example, if you are a restaurant that had a 20% reduction in gross receipts in Q1 2021 versus Q1 2019, you can then request a tax credit of up to $7,000 per employee for the first quarter of the year. If that trend continues through the rest of 2021 and you have lower gross receipts, you could potentially claim the ERTC for all four quarters of 2021. For a restaurant with 30 employees, for example, the credit could be worth as much as $840,000 in 2021.

One neat thing for eligible employers that have fewer than 500 full-time employees is they can also request advance payment of the ERTC using IRS Form 7200. Employers with more than 500 employees are not able to receive an advanceable ERTC.

ERTC and PPP can’t be applied to the same payroll

One of the most significant changes Congress made to the ERTC in late 2020 was allowing employers who took PPP loans to use the ERTC. However, if your company did take a PPP loan, you can’t claim the ERTC for the same wages counted for PPP forgiveness. Basically, you can’t claim the same payroll costs for both ERTC and PPP.

Talk with your accountant or payroll preparer about ERTC

While the ERTC is a great tool to help struggling businesses reduce their tax burden, it is still a tad complicated to take advantage of it. If you believe your company is eligible, you should immediately speak with your accountant and potentially your payroll preparer. Because the credit size depends on how much you normally pay in Social Security taxes, both your accountant and payroll company can help you determine how much your credit is worth and how much tax should not be paid to the federal government. A financial professional can also help make sure you don’t apply the same payroll for both PPP loan forgiveness and the ERTC.

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Published April 30, 2021