Small businesses have an opportunity to use newly passed tax credits to help them keep afloat in the financial storm created by the coronavirus (COVID-19): the Employee Retention Tax Credit.
The ERTCs, applied to payroll taxes paid by the employer, may help businesses retain employees instead of resorting to layoffs or furloughs. In some cases, ERTC credits may be refundable, with businesses receiving back cash. The ERTC is part of the Coronavirus Aid, Relief and Economic Security Act.
The ERTC provides a fully refundable credit of up to 50% of qualified employee wages — up to $10,000 per employee — from March 12, 2020, through Jan. 1, 2021. The maximum credit that can be claimed is $5,000 per employee.
Qualifying employers may immediately reduce their payroll tax deposits by 50% of eligible wages. The ERTC refund comes into play if the employer’s required quarterly payroll tax deposits are less than the credit they would otherwise be eligible to claim. The refundable portion is the amount of the difference on their quarterly payroll report, Form 941.
The ERTC applies only to certain categories of qualified businesses affected by the COVID-19 pandemic. As a result, government contractors and self-employed individuals are not eligible for this credit.
According to the IRS website, one of the following two qualifications must be met for eligibility:
- Business operations must be fully or partially suspended due to COVID-19 mandates; or
- There must be a 50% decline in gross receipts for the applicable quarter in 2020 compared with the same quarter in 2019.
With respect to the gross receipts decline, the threshold is met when a business ends a calendar quarter with gross receipts that are less than 50% of receipts from the same quarter of 2019. The significant gross receipts decline ends for purposes of the ERTC with the first 2020 calendar quarter in which gross receipts are 80% or more than the same calendar quarter in 2019.
A business’s number of employees affects ERTC eligibility. For businesses with fewer than 100 employees, all employees are included in the wage base for calculating the credit. For businesses with more than 100 employees, only included are workers who are being paid but not currently working due to COVID-19 cutbacks.
Eligible businesses can potentially use taxes already paid to help fund employees' qualified wages. Says the IRS, “In anticipation of receiving the credits, Eligible Employers can fund qualified wages by accessing federal employment taxes, including withheld taxes, that are required to be deposited with the IRS or by requesting an advance of the credit from the IRS.”
Businesses are not eligible for the ERTC if they’ve taken certain other types of COVID-19-inspired government loans. Generally, employers who received either a Payroll Protection Program or an Economic Injury Disaster Loan may not also claim the ERTC. Nevertheless, the ERTC may be an option for anyone who didn’t receive a PPP or EIDL.
The IRS question and answer page on ERTC is helpful: https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act. However, as the rules to provisions of the coronavirus relief bill tend to change, and as nothing surrounding government-provided money is without strings or conditions, the safest route is to also consult an accountant or financial adviser experienced in tax law and policy.
The basic questions businesses must answer for themselves are, am I eligible for ERTC credits? If so, do I want to take them? After that, it’s a financial question based on all aspects of a business’s situation as it navigates through the COVID-19 hurricane.
This article first appeared in KnoxNews.