The employee retention tax credit is a payroll tax credit claimed on Form 941 that not very many people know about. Originally you could either choose to have a PPP loan or you could claim the ERTC. Nearly every client chose the PPP loan because the terms were far more favorable.
Now the law has changed, and businesses are allowed to have both a PPP loan AND claim the ERTC so it’s worth revisiting the ERTC and see what else changed for 2020 and see how it works.
Generally speaking, in 2020 the ERTC is a payroll tax credit of 50% of qualifying wages, capped at $5k credit per employee. A business qualifies on a quarter by quarter basis either by having fully or partially suspended business operations or by having a 50% decline in gross receipts when compared to 2019. The qualifications are pretty complicated so I’ve made a chart to help you figure out if you qualify or not. If you have 100 or fewer employees, you get the credit for paying wages to anyone while you are in one of those qualifying quarters. If you have more than 100 employees you only get the credit if you were paying people not to work, ie paying people even though they were not providing any services at all to the business. You should go through the entire chart step by step and repeat that process for each of the 4 quarters in 2020 to see which quarters might qualify. Here’s a PDF of the chart.
Qualifying is a complicated process, hence the chart to help you. Figuring out the amount of the credit is probably even more complicated and not a task to be taken lightly. In theory it’s a simple calculation of 50% of the wages, capped at a $5k credit per employee in the 2020 year. The trouble comes into play when you consider the PPP loan and the rules that you cannot double dip and count wages for both the PPP forgiveness and the ERTC at the same time. Similarly, you cannot count wages used for the FFCRA sick leave credit and the ERTC at the same time.
There is lots of complexity and possible outcomes with no guidance at this point when it comes to allocating wages between using on PPP and the ERTC. You can’t use the same wages for both purposes, but that’s the beginning, middle, and end of the guidance for now. I would expect some more guidance down the road, but for now it remains unclear.
The ability to go back into the 2020 year and calculate ERTC for businesses that were affected by COVID is great. There is no specific timeline, other than the normal amended Form 941 rules, so I think waiting might be the best course of action. If you can afford to wait a few months and calculate the 2020 ERTC in the summer of 2021 I think some guidance will be issued and you can be sure you are capturing all the benefits of the ERTC for 2020.