By Giuseppe “Joe” Femia, CPA
Vice President & Director
Employers who plan to take advantage of the Employee Retention Tax Credit (ERTC) to defray certain costs of keeping employees on the payroll during the Covid-19 pandemic should act quickly, since an important window may be closing as the second quarter of 2021 ends and the effects of the pandemic – thankfully – are declining.
Since Massachusetts lifted pandemic-related restrictions on businesses as of May 29, 2021, and ended its state of emergency declaration two weeks later, the conditions that qualify businesses to claim the ERTC under the “shutdown rules” will likely not exist beyond the second quarter of 2021.
Moreover, recent guidance from the IRS has expanded use of the ERTC by allowing certain community-based financial institutions, commercial businesses and nonprofit organizations to claim the ERTC under the partial shutdown rules by documenting how government mandates caused a partial shutdown or “more than nominal” disruption in their business operation(s).
Advantages of ERTC
The ERTC can be used to offset wages and the costs of health care benefits for employees who are kept on the payroll.
A significant advantage of the ERTC is that employers may claim it quarterly when they file their Form 941 payroll tax returns, rather than waiting until the following year’s tax season. This means the tax credit can be taken in real time, helping employers cope with any decline in business they have experienced due to the pandemic.
Alternatively, employers may file amended Forms 941 to claim the ERTC for previous quarters, but this results in sometimes significant delays in receiving the tax refunds. The cash-flow benefits of filing in real time are substantial.
Employers are qualified to claim the ERTC if they experienced a government-mandated full or partial shutdown due to the pandemic, or if they experienced a significant decline in revenues (defined as a 50% decline in revenues during 2020 and 20% decline in revenues during 2021, as compared with 2019 revenues for the same quarter).
Background
The ERTC was created by the Families First Coronavirus Relief Act, enacted in March 2020, and was significantly expanded earlier this year with the passage of the American Rescue Plan Act (ARPA).
Under ARPA and subsequent legislation, the tax credit was expanded in several ways, including:
- The timeframe the tax credit covers is extended to December 31, 2021. Originally, it was scheduled to expire June 30, 2021.
- Employers who have received Payroll Protection Program (PPP) loans may now utilize the ERTC for any payroll costs not covered by their loans. This may impact your application for PPP loan forgiveness, so consult your G.T. Reilly advisor first.
- The amount of the credit has increased to 70% of the qualified wages and health care benefits (maximum of $10,000 of eligible wages per employee per quarter) paid to employees during 2021, up from 50% in the original legislation (maximum of $10,000 of eligible wages per employee per year) during 2020.
- For 2021, the maximum amount of the credit is $7,000 per quarter or an aggregate maximum of $28,000 for the year. The maximum credit for 2020 was $5,000 for the calendar year.
- For 2021 any business with less than 500 employees is eligible to receive the ERTC for all employees, whereas during 2020 only businesses with less than 100 employees could claim the credit.
- Employers can realize the tax credit more efficiently as recent rule changes have been expanded which allow employers to claim the credit by first allowing an offset of employer paid Social Security taxes and then all other federal taxes paid. If the credit is more than these taxes the employer can claim a tax refund during the quarter or subsequently by amending their Form 941.
- Businesses with 500 or fewer employees will be allowed to advance the credit at any point during the quarter based on wages paid in the same quarter in a previous year.
If you have questions about how to take advantage of the ERTC, please contact your G.T. Reilly advisor.
