Updated Employee Retention Credit: Eligibility, Process and More

The Paycheck Protection Program may have been the star of the show in the latest stimulus, but updates to the Employee Retention Tax Credit (ERTC) should not go unnoticed.

Below are the major updates to the ERTC as of March 2021, including updates from the American Recovery Plan Act (ARPA), signed into law on March 11, 2021. 

Updated Employee Retention Tax Credit

Under the Consolidated Appropriations Act, small businesses can now take advantage of both the PPP and the ERTC without penalization. And, the new bill expands the Employee Retention Tax Credit, making more companies eligible than before.

Here are the updates to the Employee Retention Tax Credit.

Eligibility

Your business is eligible if you:

• Have 500 or fewer employees (formerly 100 employees or fewer)
• Experienced a decline in gross receipts by more than 20% in any quarter of 2020 compared to the same quarter in 2019 (reduced from a 50% decline in gross receipts), or compared to the prior quarter in 2021. 

With the passage of the American Rescue Plan Act in March 2021, the Employee Retention Tax Credit was expanded to include:

• Employers who are "severely financially distressed" (i.e., those who experienced a severe decline in gross receipts) by allowing such employers to take all wages into account, not just those that are paid for employees not providing services
• Employers who qualify as a "recovery startup business" (i.e., those employers who began a trade or business after Feb. 15, 2020, and whose gross receipts average less than $1 million)

Tax-exempt organizations that fall under 501(c) must have partially or fully suspended all operations in 2020 or 2021 to qualify.

It's also important to note that eligibility ends if your gross receipts in a 2020 quarter exceed 80% compared to the same quarter in 2019. For example, if your business is down 21% in revenue in the third quarter of 2020, but you restore revenue by 81% in the fourth quarter, you will only qualify for the credit up to the third quarter. 

How Much the Tax Credit is Worth

The ERTC is worth different amounts for wages paid in 2020 and wages paid in 2021. Here's the breakdown:

• Wages paid after March 12, 2020, and before January 1, 2021: ERTC can be applied to 50% of qualifying wages up to $10,000. This means a maximum of $5,000 per employee could be credited.
• Wages paid after January 1, 2021, and before January 1, 2022: ERTC can be applied to 70% of qualifying wages of up to $10,000 per quarter for each quarter during 2021. This is a cap of $7,000 per quarter from January 1, 2021 - December 31, 2021. 

How to Claim the Credit

If you determine your business meets the requirements, the refundable tax credit can be applied against the employers' portion of payroll taxes. In other words, you are reimbursed for the credit with money that you would typically deposit for quarterly taxes. 

Even though the new bill allows companies to participate in both programs, you still need to be cautious of double-dipping. Many payroll expenses are eligible for various tax credits; however, you cannot claim the same expenses twice. Here are some stipulations to keep in mind:

• You cannot claim the ERTC and the Work Opportunity Tax Credit for the same employee in the same period.
• You cannot use PPP funds and ERTC to cover the same payroll costs.
• You cannot claim the ERTC and FFCRA tax credit on the same wages paid for sick or family leave. 

Unlike the PPP, there is no application process to claim the ERTC. All you need to do is talk to your payroll provider or tax preparer about utilizing the credit. 

The IRS has yet to release new guidance around changes made to the ERTC under the new bill, but any updates will be posted to the FAQ page of the IRS website.