Employee Retention Tax Credit
There is a credit business owners are not aware of that is very impactful to the cash flow and perhaps survival during this pandemic. The Employee Retention Tax Credit (ERTC) is a refundable credit that businesses can claim on qualified wages, including certain health insurance costs, paid to employees. If you qualify, this credit pays out the following:
- $5,000 for the first $10,000 in Qualified Wages for 2020
- $7,000 for the first $10,000 for Q1-Q4 of 2021
This credit is limited to employers with 100 full-time equivalents (FTE) or less in 2020 and 500 or less FTE in 2021. The potential benefit can range anywhere from $5,000 to as much as $14.5 Million for the period of March 13, 2020 to December 31, 2021. If you have more than the 100 employees in 2020 or 500 for 2021, you can get credit for the employees that you paid to stay home and not work.
Wages given to workers who were paid to not work do not towards the FTEs numbers for this credit. To claim this credit, a FTE is someone who works 30 hours a week or more and 130 hours a month or more.
Qualifications:
Initially, when this credit came out of the CARES Act, an estimated 75-90% of employers were ineligible to claim this credit if you accepted $1 in the form of a Paycheck Protection Program (PPP) loan. That changed in December when President Trump signed into law changing the ERTC, allowing companies who accepted the PPP to still be eligible to receive this refundable credit, if they are a qualified employer. The following criteria is how a business qualifies:
- Any employer that carried on a trade or business in 2020 or 2021 and;
- Fully or partially suspended operations due to government orders in 2020 or 2021 or;
- Experienced a significant decline in gross receipts during a calendar quarter in 2020 or 2021 versus 2019. If you were not in business in 2019, the IRS is allowing the business to use 2020 as the comparative year.
The above does not include self-employed individuals, household employers, or government employers; however, colleges, universities, and medical care facilities can qualify for the 2020 and 2021 credit.
Government Orders Definition:
- Order- It is an order, proclamation, or decree from federal, state, or local government.
- Limit- COVID-19 limited commerce travel, or group meetings due to the virus
- Affect- This affected an employer’s operations such as closing some of all of the workplace or limited hours of operation.
Who Qualifies:
Each business must be separately analyzed on a quarter-by-quarter basis. It’s hard to imagine many small businesses that were not impacted by the aforementioned government orders definition. A few examples of businesses impact are the following:
- Restaurants
- Retail
- Professional Services
- Nonprofits
- Medical Practices
- Manufacturers
- Hotels
- Travel Companies
- Performing Arts Companies
- Colleges and Universities
If your business is not in one of the above industries, you may still qualify for the credit.. Other businesses can qualify depending on the state and government mandates that were enforced, the timeframe of such mandates, and the effects of COVID-19 to that business. Potentially, a minor disruption that causes a partial suspension of operations in any quarter should qualify the employer as eligible in that quarter.
What Can the ERTC Be Applied To?
If your business ends up qualifying for the ERTC, the credit can be applied to the following taxes:
- Federal income tax withheld from employees.
- Social security and Medicare taxes withheld from employees.
- Employer’s share of social security and Medicare taxes.
There are federal income tax consequences for the ERTC should your business qualify, and you accept the refundable credit which are:
- The credit amount is EXCLUDED from the business’s gross income.
- The employers’ deduction for wages must be reduced by the amount of the ERTC.
- Qualified wages paid to employees are taxable income to employees. Such wages do not qualify as disaster relief payments under Internal Revenue Code Section 139.
Who Should You Work With To Get This Credit:
When President Biden signed the American Rescue Plan Act into law on March 11, 2021, it enacted a five-year statue of limitations for this credit, which is unprecedented since most tax refunds have a three-year limitation. In addition, the IRS requires two pages of detailed documentation that must be generated by a client and retained for the five-years. The IRS also issued over a hundred pages of guidance that requires substantial legal and subjective interpretations.
Many publicly traded companies with large accounting and tax departments are hiring outside counsel and specialists to obtain this credit because they do not have the bandwidth nor the technical capability of satisfying the demands required by the IRS. This will be a bigger problem for most business owners who work with smaller accounting firms that have less than the larger CPA firms.
I recommend you select a firm that can offer you both an attorney-client privilege and the necessary accounting and tax knowledge. Pierre Accounting can deliver for you. We have a diverse team to include an in-house tax attorney that can provide the legal protection needed. We can also provide a fully compliant report, something most CPAs are not equipped to do.
This is a once-in-a-lifetime credit to pursue right now to inject that much needed cash flow into your business.
Eric Pierre, CPA
CEO and Owner, Pierre Accounting
512-900-8293