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Employee Retention Tax Credit (ERTC): What is it?

Also included in the Notice is guidance about how employers that take out a PPP credit may be able to claim an employee retention tax credit retroactively. The Taxpayer Relief for Disasters and Emergency Assistance Tax Relief Act of 2020 repeals this requirement, and qualifying employers may still claim the ERC even if they received one or more PPP loans. The amount of eligible wages that an eligible employer may claim for the employee retention credit does not include the amount of eligible wages earned on sick leave and family leave that an employer received a tax subsidy for under the CARES Act. Employers cannot claim the same employees for both the ERTC and the Working Opportunity Tax Credit in the same period, and cannot claim the same wages for both the ERTC and Section 45s employer credits under the Family and Medical Leave Act (FMLA). Eligible businesses may claim the refundable credit on what they would normally pay in Social Security taxes on up to 70% of the qualifying wages paid to employees.

This refundable tax credit is a relief measure for businesses, encouraging them to retain employees on the payroll. For most businesses taking advantage of the program, ERC credits are far greater than the payroll taxes paid by employers. ERC is a refundable payroll tax credit, which could be up to $5,000 per employee in 2020, and up to $21,000 per employee in 2021.

The ERC is a refundable credit that businesses can claim against qualified wages, including certain health care costs, paid to employees. The credit amount is calculated as a percentage of the Qualified Wages, including qualified allocable health plans expenses, an eligible employer pays to employees. In other words, the employer is allowed up to $5,000 ($10,000 x 50%) credit per employee over the entire calendar quarter that qualifying wages are paid.

The only restriction to ERC calculation is that an employer can calculate the ERC credit only for the first $10,000 in wages and medical expenses paid to each employee in each credit-generating period. That is, if, in any calendar quarter, the amount of an eligible employers retention credit is greater than the employers share of Social Security taxes on all wages (or all compensation, for employers subject to RRTA) paid to all employees, then the excess amount is treated as overpayment and returned to the eligible employer under Sections 6402(a) and 6413(a) of the Internal Revenue Code (theCode). Self-employed individuals are not entitled to the employee retention credit on their own self-employment earnings, although they may be eligible to claim the credit for wages paid to their employees.

The infrastructure law ends the employee retention credit for wages paid in the fourth quarter 2021 for employers who are not recovering start-up businesses. When signed into law as part of the CARES Act, the employee retention credit was equal to 50% of wages paid by qualifying employers with qualified wages from March 13, 2020, to December 31, 2020. The employee retention tax credit is an incentive initially created under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) designed to incentivize employers to retain employees on their payrolls while navigating the unprecedented effects of COVID-19. For more information about reducing deposits for the Employee Retention Tax Credit and deferring payments and deposits for employers portion of Social Security taxes that were scheduled to be paid by January 1, 2021, as part of Section 2302 of the CARES Act, see Delayed Payments and Filings of Employment Taxes Through December 31, 2020.

For 2020, the credit is 50 percent of up to $10,000 of qualified wages (including amounts paid for health coverage) for full- time, full-year employees in all qualified calendar quarters beginning March 13, 2020, and ending December 31, 2020. For purposes of the full-time worker credit, a full-time employee is defined as someone who worked at least 30 hours a week in any calendar month during 2019, or 130 hours a month (this is the monthly equivalent of 30 hours per week), and this determination is based on the shared employer responsibility provisions in the American Rescue Plan Act. Recall that a FTE for this purpose is one employee who worked 30 hours/week or 130 hours/month, and a monthly average over 2019 is required.

For employers who are eligible, including borrowers that took out loans as part of the original PPP, credit may be claimed on 50% of eligible wages paid, up to $10,000 per employee annually, for wages paid from March 13 through December 2020.

For employers with 100 or fewer full-time employees, all employees wages are eligible for the credit, regardless of whether the employer is open for business or is under a closure order. Under CAA, 2021, this ban is also extended to wages affected by certain other credits, including the research activities credit, Indian employment credit, employer differential pay credit, and the Empowerment Zone employment credit. The full refundable tax credit is equal to 50% of wages paid by an eligible business that are materially affected by COVID-19 (up to $10,000). The ERTC has expired, and qualifying employers may still apply the ERTC for 2020 or 2021 taxes when they file an amended return.

In anticipation of receiving ERTC, employers may elect to reduce the amount of employment taxes they owe the IRS, or they may apply for a payment advance from the IRS for the ERTC, using Form 7200, "Advanced Payment of Employee Taxes Due to COVID-19".

In 2021, eligible wages paid to each individual employee, which can be used to compute the ERTC, cannot exceed $10,000 each quarter. While more information is needed about which changes would be made in tax forms required for claiming the credit, employers would use Form 941-X to file retrospectively for the applicable quarter(s) that paid the qualifying wages. The American Rescue Plan Act allows some businesses that are most severely affected to claim the credit on all qualifying wages for employees, rather than only on those that are not providing services.

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