The Employee Retention Tax Credit: How Do You Claim It?

Congress created the Employee Retention Tax Credit (ERTC) in March 2020 to provide financial relief to small businesses during the pandemic.

Here’s some key facts about the ERTC and how to benefit from it.

What is the Employee Retention Tax Credit?

The ERTC is a credit against certain employment taxes for eligible employers that were shut down due to COVID-19 or that had business reductions in 2020 or 2021. Eligible employers may qualify for up to $5,000 per employee for 2020. For 2021, eligible employers can receive as much as $7,000 per employee per quarter for up to four quarters or up to $28,000 per employee.

Because the ERTC has expanded over time, it can be tricky to figure out. When the CARES Act was passed in March 2020, eligible employers had to choose between taking an SBA-backed Paycheck Protection Program (PPP) loan or the ERTC.

To date, Congress has amended the ERTC twice – in December 2020 as part of the Coronavirus Response and Relief Supplemental Appropriations Act and in March 2021 as part of the American Rescue Plan Act. The goal of both legislative fixes was to allow more employers to take advantage of the credit and to clarify that they may be eligible for both forgivable PPP loans and ERTCs.

Which Businesses Qualify for an ERTC?

The ERTC requires that employers meet certain eligibility requirements. Specifically, an employer may be eligible for an ERTC if its business was fully or partially suspended by a COVID-19 related government order; or

• For 2020, its gross receipts fell by 50% or more versus the comparable quarter in 2019. When an employer’s gross receipts rose above 80% or more versus a comparable quarter in 2019, it did not qualify for an ERTC for that quarter.
• For 2021, its gross receipts for the current or preceding quarter are below 80% of the comparable quarter in 2019. When an employer’s gross receipts go above 80% of the comparable quarter, it will not qualify for an ERTC in the next quarter.

How to Calculate Your ERTC

For 2020, eligible employers may claim a refundable tax credit against what they pay in Social Security tax on the “qualified wages” paid in an eligible quarter between March 12 and December 31, 2020. The credit is capped at 50% of $10,000 in qualified wages paid per employee (or $5,000). Any amount of an ERTC that exceeds an eligible employer’s Social Security tax owed may be directly refunded.

For 2021, eligible employers may claim a refundable tax credit against what they pay in Social Security tax on the “qualified wages” paid in an eligible quarter between January 1 and December 31, 2021. The credit is capped at 70% of $10,000 in qualified wages paid per employee per quarter (or $7,000) for up to four qualifying quarters. For example, a dealership with a 20% reduction in gross receipts in Q1 2021 versus Q1 2019 may seek a tax credit of up to $7,000 per employee for the first quarter of 2021. If that eligibility continues through the rest of 2021, an ERTC may be claimed for each quarter in 2021. For a dealership with 50 employees, total 2021 credits could be up to $1.4 million.

“Qualified wages” include health plan expenses (including any health plan expenses paid for furloughed employees). As noted earlier, eligible employers may include those that also took out forgivable PPP loans, however PPP borrowers may not claim an ERTC for the same payroll costs used to qualify for PPP loan forgiveness.

Another change: Employers with 500 or fewer employees may request an advance payment of the ERTC by filling out IRS Form 7200.