The American Rescue Plan Act (ARPA), enacted in March of 2021, extended and modified the Employee Retention Tax Credit (ERTC), a valuable tax break. Here’s a quick explanation of the rules involved.
History of the ERTC
Congress originally enacted The ERTC in March of 2020 as part of the CARES Act. It was intended to encourage employers to hire and retain employees during the COVID-19 pandemic and initially applied to wages that were paid after March 12, 2020 but before January 1, 2021. However, the ERTC was later modified and extended to apply to wages paid before July 1, 2021.
The ERTC was then modified and extended again by the American Rescue Plan Act and now applies to wages paid after June 30, 2021, and before January 1, 2022. This means that the refundable ERTC can be claimed by eligible employers against “applicable employment taxes” equal to 70% of the qualified wages the employer pays to employees in the third and fourth quarters of 2021.
Generally speaking, qualified wages are limited to $10,000 per employee per 2021 calendar quarter with the exception of the instances discussed below. As such, the maximum amount an employer can claim through the ERTC in 2021 is usually $7,000 per employee per calendar quarter or $28,000 per employee for the year.
A qualified employer is eligible to claim the ERTC if it experiences a full or partial suspension of business due to a government order or a significant decline in gross receipts. Employers with 500 full-time employees or less can claim the credit regardless of whether or not the employees for whom the credit is claimed are actually performing services. However, with the exception of the circumstances explained below, employers that have more than 500 full-time employees can only claim the ERTC if the employees for whom the credit is claimed don’t perform services.
An employer can still claim the ERTC if they received a Payroll Protection Program loan in 2020. However, in calculating the ERTC, they cannot use the same wages both for seeking loan forgiveness and for satisfying conditions of other COVID relief programs including the Restaurant Revitalization Fund program.
Recent ERTC modifications
The following modifications apply to the ERTC starting in the third quarter of 2021:
- Recovery startup businesses, generally defined as businesses that began operating after February 15, 2020, and meet certain gross receipts requirements, are qualified employers. These businesses will be eligible for an increased maximum credit of $50,000 per quarter, even if they haven’t been subject to a full or partial suspension under a government order or experienced a significant decline in gross receipts.
- For the first and second quarters of 2021, “applicable employment taxes” were defined as the employer’s share of Social Security or FICA tax (6.2% of the wages) and the Railroad Retirement Tax Act payroll tax that was attributable to the Social Security tax rate. However, starting in the third quarter of 2021, applicable employment taxes are the Medicare hospital taxes (1.45% of the wages) and the Railroad Retirement payroll tax that’s attributable to the Medicare hospital tax rate.
- For assessments relating to the ERTC, the statute of limitations won’t expire until five years after the date the original return claiming the credit is filed (or treated as filed).
- Employers that are “severely financially distressed” and have suffered a decline in quarterly gross receipts of 90% or more compared to the same quarter in 2019 are allowed to treat wages paid during those quarters (up to $10,000) as qualified wages. This allows for employers with more than 500 employees to treat wages as qualified wages (regardless of whether the employees provide services) if the employer is under severe financial distress.
If you have any questions related to claiming the ERTC, contact us.