Employee Retention Tax Credit Q & A
The International Franchise Association is a strong supporter of the Employee Retention Tax Credit, a lesser-known liquidity tool that is important for many sectors of the economy affected by the COVID-19 pandemic. In 2020, IFA spearheaded coalition efforts to gain broad-based support from businesses of all sizes and all affected sectors in support of the program, culminating in a letter to the U.S. Congress with support from over 130 associations.
We welcome you to watch a short video below featuring the lead authorizing legislator behind the program, Congresswoman Stephanie Murphy of Winter Park, Florida, and Shelly Sun, the CEO and Founder of BrightStar Care and IFA’s 2017 Chair of the Board.
What is the Employee Retention Tax Credit (ERTC)?
The ERTC is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees. This refundable tax credit can be applied against an employer’s portion of payroll taxes, which are reported quarterly. In sum, your company can be reimbursed for the credit by taking out deposits of payroll taxes that would have normally been withheld from employee wages.
Under the recently enacted American Rescue Plan Act and previously under the Consolidated Appropriations Act, 2021, the employee retention credit, a provision of the CARES Act, is extended and expanded. It can be claimed through Dec. 31, 2021 to eligible employers who retained employees during the COVID-19 pandemic.
Please note that further guidance is necessary from the Internal Revenue Service to assess upcoming changes to Form 941 necessary to claim the credit, this article highlights eligibility, qualified wages, how the credits work and more. Please monitor the IRS website for further updates to their FAQ. This guidance is only informational and not legal authority.
How much is the credit worth?
The ERTC is worth different amounts for 2020 and 2021:
- For wages paid after March 12, 2020, and before January 1, 2021, the ERTC is equal to 50% of qualifying wages up to $10,000. This means a maximum of $5,000 per employee could be credited back to your company if it qualifies.
- For wages paid after December 31, 2020, and before December 31, 2021, the ERTC can be applied to 70% of qualifying wages of up to $10,000 per quarter. This means companies could receive a maximum of $14,000 per employee.
- Large employers ( > 100 employees for purposes of 2020 credit, 500 employees for purposes of 2021 credit) are subject to special rules in determining eligible wages.
Wages can include a portion of the cost of employer-provided health care, but does not include FFCRA paid sick or family leave reimbursements.
Are there special rules for the hardest hit businesses?
The American Rescue Plan Act allows certain hardest-hit businesses to claim the credit against all employee’s qualified wages instead of just those who are not providing services. These hardest hit businesses are defined as employers whose gross receipts in the quarter are less than 10% of what they were in a comparable quarter in 2019 or 2020.
Which employers are eligible for advances of credits?
Most employers, including colleges, universities, hospitals and 501(c) organizations following the enactment of the American Response Plan Act, can qualify for the credit. Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wishes to utilize the credit:
- 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 is suspended, not the entire quarter.
Note that some businesses, based on IRS guidance, generally do not meet this factor test and would not qualify. This could include those businesses considered essential or businesses shuttered but able to continue their operations largely intact through telework. However, any of these businesses still may qualify for the credit with the second factor test:
- An employer that has a significant decline in gross receipts.
- Businesses that experienced a decline in gross receipts of > 50% in any quarter of 2020 compared to the same quarter in 2019 are eligible for the 2020 credit; businesses that experienced a decline in gross receipts of > 20% in any quarter of 2021 compared to the same quarter in 2019 are eligible for the 2021 credit.
If I received funding from the Paycheck Protection Program, am I also eligible for the ERTC?
Companies that received PPP funding are now eligible to also apply for the Employee Retention Credit with some restrictions that prohibit double dipping.
What other resources are available for me?
Please click here to watch a detailed webinar with several tax experts from the 2021 IFA Virtual Convention.
Generally, further guidance is necessary from the Internal Revenue Service to assess upcoming changes to Form 941 necessary to claim the credit. These updates will be located on the Internal Revenue Service website.