The Employee Retention Tax Credit

The Employee Retention Tax Credit

by Amie Remington, Esq., on March 25, 2021
The Employee Retention Tax Credit (ERTC) is an employer-friendly provision of the 2020 Coronavirus Aid, Relief and Economic Security Act (the CARES Act). The credit was designed to benefit employers who retained employees during the pandemic.
 
What is the ERTC?
 
The ERTC is a fully refundable payroll tax credit applied to an employer’s portion of federal social security taxes. The current social security tax rate is 12.4%. Employers pay half of this amount, or 6.2%, of the first $142,800 of wages paid to each employee per year.
 
To determine eligibility and to obtain the full amount of the credit, it is essential that employers work with their Certified Public Accounts or other qualified tax advisors.
 
What is the amount of credit available under the ERTC?
 
Obtaining the credits requires that employers and their CPAs or other qualified tax advisor examine each year (2020 and 2021) and each quarter separately. Employers may qualify for credits during one year but not the other.
 
For the period after  March 12, 2020 and before January 1, 2021, an employer is eligible to claim the ERTC under either of two circumstances:
 
First, an employer is eligible if it had a reduction in gross receipts of at least 50% during the application comparison period in 2019. For example, if an employer’s Quarter 3 2020 gross receipts were 60% less than its Quarter 3 2019 gross receipts, the employer would qualify for the ERTC. This is further explained in #40 of the IRS Frequently Asked Question, available at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
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Second, an employer is eligible if it fully or partially suspended operations due to a government order due to the pandemic. To determine what constitutes a full or partial suspension or a government order, please questions #28-38 of the IRS Frequently Asked Question, available at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
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If an employer determines it is eligible for this period of time, the employer may claim 50% of each employees’ qualified wages for the quarter. There is a maximum credit of $5,000 per employee for 2020.
 
For the period of January 1, 2021 – June 30, 2021, the credit is more generous. For this period of time, an employer is eligible to claim the ERTC under either of two circumstances:
 
First, an employer is eligible if it had a reduction in gross receipts of at least 20% during the application comparison period in 2019. For example, if an employer’s Quarter 1 2021 gross receipts were 30% less than its Quarter 1 2019 gross receipts, the employer would qualify for the ERTC. This is further explained in #40 of the IRS Frequently Asked Question, available at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
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OR

Second, an employer is eligible if it fully or partially suspended operations due to a government order due to the pandemic. To determine what constitutes a full or partial suspension or a government order, please questions #28-38 of the IRS Frequently Asked Question, available at https://www.irs.gov/newsroom/faqs-employee-retention-credit-under-the-cares-act
 
If an employer determines it is eligible for the credits during this time period, the employer may claim 70% of each employees’ qualified wages for the quarter. There is a maximum credit of $7,000 per employee per quarter and a maximum credit of $14,000 per employee for the year.
 
The credit was recently extended to apply to the  period of July 1, 2021 – December 31, 2021.  The credit for this period of time applies to the employer’s portion of Medicare taxes instead of social security taxes. The employer portion of Medicare taxes is currently 1.45% of payroll. We will provide additional information on claiming the credits for this period of time as guidance is released.
 
Can the ERTC be claimed by employers whose PPP loans were forgiven?
 
The CARES Act initially prohibited employers who received loan forgiveness under the Paycheck Protection Program (PPP) from seeking ERTC credits. However, Section 206 of the Tax Certainty and Disaster Tax Relief Act of 2020 allows employers who are eligible for the ERTC to claim the tax credit on any qualified wages that are not counted as payroll costs for PPP forgiveness purposes. To ensure the credit is not taken on wages which have already been forgiven, employers should work with their CPAs or other qualified tax advisors to review their PPP loan and forgiveness.
 
What is a qualified wage for purposes of the ERTC?
 
The definition of “qualified wage” is different for the year 2020 than it is for 2021.
 
For the year 2020, a “qualified wage” depends on the employer’s size.
 
  • For employers with 100 or fewer full-time employees, qualified wages are all employee wages paid during any period in the calendar quarter in which business operations are fully or partially suspended due to a governmental order OR any calendar quarter in which the business is experiencing a significant decline in gross receipts.
 
  • For employers with more than 100 full-time employees, qualified wages are wages paid to employees not performing services due to COVID19 circumstances (either suspension of operations or reduction of gross receipts).
The 2021 rules allow more employers to have “qualified wages”.
 
  • For employers with fewer than 500 full-time employees, qualified wages are all employee wages paid during any period in the calendar quarter in which business operations are fully or partially suspended due to a governmental order OR any calendar quarter in which the business is experiencing a significant decline in gross receipts.
 
  • Employers with more than 500 full-time employees are not entitled to the credit.
 
LandrumHR cannot determine a client’s eligibility for the ERTC or the amounts of the credit. Instead, LandrumHR advises that each client work with its CPA or other qualified tax advisor to determine eligibility and the amount of any credit it may be entitled to.
 
As a LandrumHR PEO client, what do I need to do to claim the credit and what are the deadlines?
 
The answer depends on the time period for which you are claiming the credit. LandrumHR PEO clients who wish to receive the credit for any period must complete an Electronic Interest Form, which is available on the left side of the screen of the LandrumHR Management Hub. Once received, we will provide you with an Addendum to your current Client Service Agreement for signature. 
 
For the periods of Q2, Q3 or Q4 of 2020, anytime before April 30, 2021, you will provide LandrumHR all documentation and the signed Attestation Form for each applicable quarter. Once received, we will claim the credits on our IRS Form 941X. The credit will be provided to you following receipt of the credit by LandrumHR from the IRS.
 
For the period of Q1 of 2021, anytime before March 31, 2021, you will complete IRS Form 7200 and file it with the IRS. You will provide a copy of the filed IRS Form 7200 to LandrumHR with the signed Attestation Form and other back-up documentation. Once received, LandrumHR  will document  the request for advance payment of the credits on our IRS Form 941. The IRS will issue the credit directly to you. 
 
For the period of Q2 of 2021, anytime before June 30, 2021, you will complete IRS Form 7200 and file it with the IRS. You will provide a copy of the filed IRS Form 7200 to LandrumHR with the signed Attestation Form and other back-up documentation. Once received, LandrumHR will document  the request for advance payment of the credits on our IRS Form 941. The IRS will issue the credit directly to you. 
 
As guidance is released by the IRS, LandrumHR will provide further information for PEO clients who wish to receive the credits for Q3 and Q4 of 2021.
 
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Amie Remington, Esq.

As General Counsel of LandrumHR, Amie advises on all business and employment-related legal issues. She is also a regular speaker at national and state-wide events, discussing all aspects of employment law that affect all employers, including Title VII of the Civil Rights Act, the Family and Medical Leave Act, the Fair Labor Standards Act, the National Labor Relations Act, the Americans with Disabilities Act, and the state counterparts to these laws. Before joining LandrumHR, Amie was a partner in the law firm of Bozeman, Jenkins & Matthews, P.A., where she represented employers, management and the State of Florida in all types of employment-related matters. At the firm, Amie focused on policy creation, prevention of discrimination and harassment and management education and training, as well as all aspects of employment litigation, including trial and appeal work.

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