On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law. The CARES Act introduced the Employee Retention Tax Credit (ERTC), a new tax credit to incentivize employers, who are economically distressed due to COVID-19, to retain employees.
The ERTC provides a 50% tax credit on qualified wages paid to employees. For every dollar of qualified wages paid to an employee, the employer can claim a credit of 50 cents. There is a $10,000 cap on qualified wages per employee. This means that an employer can claim up to $5,000 in ERTC credits per employee. The credit offsets the employer portion of Social Security payroll taxes and any credit in excess of that payroll liability is fully refundable.
Employers of any size are eligible to claim the ERTC credit, provided they carry on a trade or business in 2020 and meet one of two following circumstances:
- During any 2020 calendar quarter, the employer fully or partially suspends operations due to government orders due to COVID-19; or
- During 2020, the employer experiences a period of significant decline in gross receipts. A period of significant decline in gross receipts begins in any 2020 calendar quarter where gross receipts are less than 50% of the gross receipts in the same quarter in 2019 and ends in the 2020 calendar quarter where gross receipts are more than 80% of the gross receipts for the same quarter in 2019.
What wages qualify for the ERTC credit depends on the average number of full-time employees employed by the employer in 2019.
- If the employer employed more than 100 full-time employees in 2019, then only wages paid to employees who cannot provide services (i.e., actively work) for the employer are considered qualified wages.
- If the employer had 100 or less full-time employees in 2019, then wages paid to any employee, regardless of whether they are providing services to the employer, are considered qualified wages.
Only wages that are paid between March 13, 2020, and Dec. 31, 2020, and are paid when the employer meets the eligibility requirements discussed above, are eligible for the ERTC credit. For example, if an employer’s operations are suspended in the second quarter of 2020 and the employer experiences a significant decline in gross receipts in the second and third quarters of 2020, then only the wages paid during the second and third quarters may be considered qualified wages.
Control and affiliated service group rules apply
The IRS control group and affiliated service group rules apply to ERTC credits. Under these rules, certain related employers are considered a single employer. As a result, eligibility for the ERTC credit and the average number of full-time employees in 2019 would be determined by looking at both the subsidiary and the parent. For example, under the control group rules, a wholly owned subsidiary and its parent corporation are considered a single employer. If the subsidiary had an average of 50 full-time employees in 2019 and the parent had an average of 300 full-time employees in 2019, then the average number of full-time employees for both companies would be more than 100. As such, both the subsidiary and parent would only be permitted to claim credits on wages paid to employees that are not working.
There are several limitations on eligibility for the credit.
- Government employers are not eligible for the ERTC credit.
- If an employee is eligible for Work Opportunity tax credits under Code section 51, their wages are not qualified wages.
- An employer may not double-count wages to claim FFCRA tax credits or Code Section 45S Employer Credits (for FMLA leave) for the same dollar.
- Any raise given to an employee in the 30-day period immediately preceding the qualified wage period will not be counted towards qualified wages.
- Employers with a Paycheck Protection Program Loan from the SBA may not claim an ERTC credit. If an employer takes a Paycheck Protection Program Loan after claiming the credit, the IRS will recapture the credit.
For information on how to claim the credit, click here.
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