06 Aug Understanding the evolution of the Employee Retention Tax Credit
The way the Employee Retention Tax Credit functions has evolved since it was first crafted to help businesses struggle during the pandemic. Keep reading to find out how it has changed and what the changes could mean for your business.
The following chart shows how the ERTC has evolved, from how it functioned in 2020 under the Consolidated Appropriations Act (CAA), to how the ERTC functioned in 2021 (Q1 & Q2) under the CAA, to how the ERTC currently functions in 2021 (Q3 & Q4) under the American Rescue Plan Act.
EMPLOYEE RETENTION TAX CREDIT OVERVIEW |
| CONSOLIDATED APPROPRIATIONS ACT (RELIEF ACT)* | CONSOLIDATED APPROPRIATIONS ACT (RELIEF ACT) | AMERICAN RESCUE PLAN ACT | |
| Period Covered | 3/13/20 – 12/31/20 | 1/1/21 – 6/30/21 (Q1 & Q2) | 6/30/21 – 12/31/21 (Q3 & Q4) |
| Date Issued | 12/27/20 | 12/27/20 | 3/11/21 |
| IRS Guidance | 2021-20 | 2021-23 | Not issued |
| Number of Employees for Eligibility | < 100 | < 500 | < 500 |
| Quarter Comparison | 2020 to 2019 | Q1 2021 to Q1 2019 or Q4 2020 to Q4 2019,
Q2 2021 to Q2 2019 |
Q3 2021 to 2019
Q4 2021 to 2019 |
| Quarterly Gross Receipts Reduction -orPartial Shutdown | > 50% reduction -or Government mandated partial or full shutdown | > 20% reduction -or Government mandated partial or full shutdown | > 20% reduction -or Government mandated partial or full shutdown |
| PPP Interaction | Can claim ERTC, but can’t use wages claimed as PPP forgiveness | Business can claim ERTC, but can’t use wages claimed as PPP forgiveness | Can claim ERTC, but can’t use wages claimed as PPP forgiveness |
| Calculation | 50% of the first $10,000 in qualified wages per employee | 70% of the first $10,000 in qualified wages per employee in a quarter | 70% of the first $10,000 in qualified wages per employee in a quarter |
| Maximum Credit Per Employee Per Quarter | N/A | $7,000 | $7,000 |
| Maximum Credit Per Employee Per Year | $5,000 for 2020 Year | $28,000 for 2021 Year | |
Modifications
Beginning in the third quarter of 2021, the following modifications apply to the ERTC:
How applicable employment taxes are defined
Applicable employment taxes are the Medicare hospital taxes (1.45% of the wages) and the Railroad Retirement payroll tax that’s attributable to the Medicare hospital tax rate. For the first and second quarters of 2021, “applicable employment taxes” were defined as the employer’s share of Social Security or FICA tax (6.2% of the wages) and the Railroad Retirement Tax Act payroll tax that was attributable to the Social Security tax rate.
Recovery startup businesses are qualified employers.
These are generally defined as businesses that began operating after February 15, 2020, and that meet certain gross receipts requirements. These recovery startup businesses will be eligible for an increased maximum credit of $50,000 per quarter, even if they haven’t experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.
Qualified wages
A “severely financially distressed” employer that has suffered a decline in quarterly gross receipts of 90% or more compared to the same quarter in 2019 can treat wages (up to $10,000) paid during those quarters as qualified wages. This allows an employer with over 500 employees under severe financial distress to treat those wages as qualified wages whether or not employees actually provide services.
The statute of limitations
The statute of limitations for assessments relating to the ERTC won’t expire until five years after the date the original return claiming the credit is filed (or treated as filed).
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