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 2021. You can also go back to 2020 and calculate the ERTC. That’s a whole separate post you can see here.
Generally speaking, in 2021 the ERTC is a payroll tax credit of 70% of qualifying wages, capped at $7k credit per employee per quarter and it’s available for the first two quarters in 2021. A business qualifies on a quarter by quarter basis either by having fully or partially suspended business operations or by having an 20% decline in gross receipts when compared to 2019. The qualifications are pretty complicated, and I’ve made a chart to help you figure out if you qualify or not. Please note this chart is different than the chart to qualify in 2020. Here’s a PDF of the chart.
If you have 500 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 500 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 first two quarters in 2021 to see which quarters might qualify.
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 70% of the wages, capped at a $7k credit per employee per quarter in 2021 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.
Going into 2021 you really need to look closely at the ERTC and the PPP second draw. The qualifications for the two programs are different, but if you intend to use a PPP second draw you need to consider how that will interact with the 2021 ERTC for your business. There is an incredible opportunity to maximize the PPP second draw and the 2021 ERTC but only if you do planning before you go and apply for that PPP second draw. Contact any of Our Leadership Team for questions or more information.