By Evelyn A. Haralampu, Partner
During the COVID-19 emergency, the federal government offered much-needed liquidity to qualifying businesses and nonprofits through loans and payroll tax credits. Qualified employers have been allowed credits against certain 2020 and 2021 tax withholding under the Employee Retention Tax Credit (ERTC) program. This commentary addresses the ERTC rules for 2021, which are different from those for 2020.
The wages supporting the ERTC must not have already been the basis of any Paycheck Protection Program (PPP) loan that was forgiven. Otherwise, employers may qualify for the ERTC on wages paid to employees from January 1, 2021, to September 30, 2021.
Only a recovery start-up may take the ERTC for the fourth quarter of 2021. A recovery start-up is a business that began operations after February 15, 2020, had less than $1 million in annual gross receipts, and did not suffer a significant decline or shut down due to the COVID-19 emergency.
The ERTC is available to all qualified employers regardless of size and includes tax-exempt organizations. The credit is not available to the self-employed for their own services but is available for their employees’ services.
To qualify for the ERTC, an entity carrying on a trade or business for profit or a 501(a) non-profit must have met one of the following requirements in the quarter in which it claims the credit:
- There is a governmental order fully or partially suspending the employer’s trade or business during the calendar quarter.
- Gross receipts for the 2020 calendar quarter are less than 80 percent of gross receipts for the same calendar quarter in 2019.
Limits on Credit
For wages paid in any calendar quarter beginning on January 1, 2021, and ending on September 30, 2021, an ERTC against applicable employment taxes (i.e., the employer’s portion of Medicare tax less credits for sick leave wages and qualified family leave wages) is allowed in an amount per employee capped at 70% of the qualified wages up to $10,000. Because only wages up to $10,000 in a 2021 calendar quarter can be considered for the ERTC, the maximum credit for any employee is $7,000 for the quarter.
When counting an employee’s wages, the employer can include the nontaxable premiums that the employer pays for the employee under the group health insurance.
(For wages paid in the 2020 calendar quarter, the ERTC rules were different, and the credit was capped at 50% of an employee’s qualified wages no greater than $10,000, i.e., $5,000.)
Retroactive Termination Under the IIJA
The Infrastructure Investment and Jobs Act (IIJA; PL 117-58 effective Nov. 15, 2021) retroactively terminated the ERTC limiting the credit to qualified wages paid through September 30, 2021, for most businesses. Any business that received a tax credit under the old rules that exceeds what the IIJA allows must repay the excess. Only recovery start-ups may receive credit for the fourth calendar quarter of 2021.
How to Claim the Credit
A business may file for the ERTC using Form 941-X for the relevant quarter. Forms 941-X are due within three years of the date the Form 941 was filed or two years from the date the tax was paid, whichever is later.
IRS has warned that certain vendors are aggressively marketing ERTC help in the media, charging large fees, and claiming credit for employers that do not qualify. The IRS is auditing businesses that claim the ERTC to clamp down on any inappropriate application of the rules.
For a chart explaining the variance in the law under ERTC during the pandemic period, see here.
- Identify the 2021 calendar quarters through September 30, 2021, that meet the qualification for the ERTC. Recover start-ups may also consider the fourth quarter of 2021.
- Identify employees’ wages between January 1, 2021, and September 30, 2021, that were not considered for any forgiven PPP loan. Wages eligible for the ERTC include the amount of nontaxable premiums the employer pays for the employee’s group health insurance coverage.
- Use Form 941-X to apply for the ERTC against Medicare taxes. Reduce any ERTC by any credits taken for sick leave wages and qualified family leave wages.
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