What’s going on with the ERTC? It has been extended through the end of 2021, more employers are eligible to claim it, and the amount of the credit is greater, especially for employers hit especially hard by the pandemic.
Is it worth looking into? Definitely. Keep reading.
As a brief background, the ERTC is a refundable payroll credit of 50% of qualified wages paid in 2020 (up to $5,000 per employee for all quarters) and of 70% of qualified wages paid in 2021 (up to $7,000 per employee per quarter). An employer is eligible for the credit if business operations were suspended by a shutdown order or it has seen a significant decline in gross receipts as compared to the same quarter in 2019.
Based on recent law changes, a maximum credit of $28,000 per employee is available for 2021. This could mean a significant refund. For example, if you have 100 employees, that’s a potential credit of $2.8 million, just for 2021. Assuming your payroll tax obligation is $200,000, that leaves $2.6 million cash to reinvest in your business.
Here’s a summary of the key differences:
|Employee Threshold||Credit for wages paid to ALL employees if < 100 full-time employees||Credit for wages paid to ALL employees if < 500 full-time employees||Employers with higher # of employees qualify for the credit|
|Amount of Credit||50% of qualified wages, up to $5,000 max per employee per year||70% of qualified wages, up to $7,000 max per employee per quarter||Max credit of $28,000 per employee in 2021|
|Drop in Gross Receipts||50% compared to same quarter in 2019||Only 20% compared to same 2019 quarter; with a special rule for Q1 of 2021 (see below)||Lower drop threshold means more eligibility|
Also, the following applies for Q3 and Q4 of 2021:
- Certain start-ups that began business after the COVID-19 pandemic began but are not otherwise eligible may claim a credit if they average less than $1 million in gross receipts over three years; and
- Certain severely distressed businesses (> 90% drop in gross receipts) with more than 500 employees can claim the credit for wages paid to all employees (regardless if they were working or not).
Here’s the “special rule” referred to above:
In determining eligibility for a 2021 quarter, you may compare gross receipts from the preceding quarter to the comparable quarter in 2019. For example, let’s say you want to claim the credit in Q1 of 2020 but cannot because business is doing better, and gross receipts are 85% what they were in Q1 of 2019. That’s a good thing, right?
Let’s further suppose that gross receipts for Q4 of 2020 were 75% of what they were in Q4 of 2019, so you didn’t meet the 50% drop test for that quarter. Now, you can claim the credit for Q1 of 2021 by using Q4 2020 numbers. Because there was a 25% drop (more than the 20% requisite), you may be eligible to claim the credit.
Have you already filed your payroll tax return? Not to fret; it can be amended. Also, you can still claim the credit even if you received one or more PPP loans; however, careful planning is necessary to ensure wages are available to claim the ERTC.
For more information on COVID-19 tax relief or other tax planning matters, please visit our blog under Thought Leadership on SingerLewak’s website. For assistance in determining eligibility for the credits, calculating the amount of the credits, and/or claiming the credits, please contact one of the persons listed below.
Meghan Andersson – [email protected]
Mark Cook – [email protected]
Jason Borkes – [email protected]