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The Employee Retention Tax Credit (ERTC), another portion of the CARES Act, is designed to incentivize businesses to keep employees on their payroll during the COVID-19 pandemic. — Getty Images/megaflopp

With many American businesses around the country struggling due to the effects of coronavirus, the government responded by passing the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While much of the CARES Act was focused on providing forgivable small business loans via the Paycheck Protection Program, another part of the Act included a new Employee Retention Tax Credit (ERTC) that could help some businesses as well.

The ERTC has been designed to incentivize businesses of all sizes to keep employees on their payroll during this period of uncertainty, especially those companies that have been forced to close or are partially close. Businesses that lost significant revenue may also be eligible for this tax credit.

The U.S. Chamber of Commerce has created a useful guide to the new Employee Retention Tax Credit to walk employers through how the ERTC works. Below, businesses can also find some important questions and answers to help get a better understanding of these new credits and which companies can receive them.

Is my company eligible?

Businesses of all sizes, including non-profits, can receive the ERTC in two circumstances:

  • If your business operations were fully or partially suspended as a result of government-mandated COVID-19 shut-down order, or
  • If your business experiences a decline in gross receipts by more than 50% in a quarter compared to the same quarter in 2019.

For the second qualifier, eligibility ends if gross receipts in a quarter exceed 80% compared to the same quarter in 2019. For example, this means if your business has a 2020 second quarter where revenue is down 51%, but then your 2020 third quarter has revenue up by 81%, then you only qualify during the second quarter.

In regards to tax-exempt organizations that fall under 501(c) categorization, they must have partially or fully suspended all operations to qualify.

Importantly, any employer who receives a Paycheck Protection Program (PPP) loan will not be eligible for the ERTC.

Marilyn Landis, president and CEO of Basic Business Concepts, discuss small business coronavirus tax changes. — National Small Business Town Hall by the U.S. Chamber of Commerce and Inc.

Importantly, any employer who receives a Paycheck Protection Program (PPP) loan will not be eligible for the ERTC.

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How much is the tax credit worth?

The amount of the tax credit is 50% of qualifying wages, with payment up to $10,000 in total. Wages are not limited to cash payments, but can also include a portion of the cost of employer-provided health care. However, compensation does not include paid sick or family leave for which the employer is reimbursed under the Families First Coronavirus Response Act. This credit can be obtained on wages paid or incurred from March 13, 2020, through January 1, 2021.

Which employees count toward this?

The size of your company determines which employees count toward the ERTC, according to the IRS:

  • If your company has 100 or fewer full-time employees on average in 2019, then all employees — regardless if they worked or not — count toward eligibility.
  • If your company has more than 100 employees on average in 2019, full-time employees who received wages but did not work during the calendar quarter count toward eligibility.

Importantly, employers may not claim the same employee for this credit and the Work Opportunity Tax Credit for the same period.

How do I receive this credit?

This refundable tax credit can be applied against the employer’s portion of payroll taxes, which are reported quarterly. Basically, your company can be reimbursed for the credit by taking out deposits of payroll taxes that would have normally been withheld from employee wages.

Eligible employers can report wages and related health insurance costs for each quarter on their quarterly employment tax returns via a Form 941 beginning with the second quarter of 2020. Additionally, if a company’s employment tax deposits do not cover the credit cost, that employer can receive a payment in advance from the IRS by submitting a Form 7200.

The Internal Revenue Service may issue further guidance regarding the ERTC process, so please contact the IRS if you have questions.

For more resources from the U.S. Chamber of Commerce:

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Published April 07, 2020