Understanding the Employee Retention Tax Credit (ERTC)
Understanding the Employee Retention Credit (ERC)
As part of the CARES Act, the Employee Retention Credit (ERC) was designed to give significant relief to businesses and nonprofits either ordered to close, to reduce operations or to have suffered significant losses in revenue (or funding as it relates to nonprofits). The credit available originally announced in 2020 was significantly changed by the Consolidated Appropriations Act signed on December 27, 2020. That act also modified and extended the credit through the first half of 2021. While the ERC has been modified since its original enactment, the potential for tax savings can still be a huge benefit to businesses and nonprofits.
To summarize, the Employee Retention Credit (sometimes referred to as the ERTC, the Employee Retention Tax Credit) is a refundable tax credit for businesses and nonprofits that continued paying employees while they were shut down due to the pandemic in 2020 and 2021, or suffered significant declines in revenues or funding from March 13, 2020, to December 31, 2021. Eligible employers and organizations could receive credits worth up to $26,000 per retained employee. The Employee Retention Credit does allow businesses or nonprofits to claim a payroll tax credit or receive a refund even if it received a PPP loan though there are restrictions and important nuances to remain in compliance. Also, the credit may still be available on an amended tax return.
As a reminder, here are the IRS requirements:
- Sustained full/partial suspension of operations due to orders from a governmental authority that limited commerce, travel or group meetings due to COVID-19 during 2020 or the first three quarters of 2021,
- Experienced a significant decline in gross receipts (or funding) during 2020 or in the first three quarters of 2021, or
- Qualified as a recovery startup business (which can claim the credit for up to $50,000 total per quarter without showing suspended operations or reduced receipts) for the third or fourth quarters of 2021. (Qualified recovery startups are those that began operating after February 15, 2020, and have annual gross receipts of less than or equal to $1 million for the three tax years preceding the quarter for which they are claiming the ERC.)
- Also, a business can’t claim the ERC on wages that it reported as payroll costs when it applied for Paycheck Protection Program (PPP) loan forgiveness or it was used to claim certain other tax credits. And, a business must reduce the wage deductions claimed on its federal income tax return by the amount of credits.
As evident in the above, even if you’re eligible for the Employee Retention Credit, you could run into trouble if you failed to reduce your wage deductions accordingly or claimed it on wages that you also used to claim other credits. If you have not already realized the benefits of the Employee Retention Credit or have questions about the program, please reach out to us!.