Don’t Lose Out on a Valuable Payroll Tax Credit

Don’t Lose Out on a Valuable Payroll Tax Credit

The Employee Retention Tax Credit was created to encourage employers to continue to pay their employees during the pandemic.  This credit which as the result of the CARES act, provides qualifying employers a payroll tax credit on wages paid to employees.  The potential credit can be up to $5,000 per employee in 2020 and up to $21,000 per employee through the first three quarters of 2021.  If the program continues through the 4th quarter of 2021, a business can receive an additional $7,000 per employee.

Qualifications:

2020

In order to qualify for this credit in 2020, the employer must have experienced a 50% or greater decline in gross receipts in a calendar quarter in 2020 as compared to the same quarter in 2019.

Or

The operation of the trade or business was fully or partially suspended due from orders from an appropriate governmental authority.

If an employer qualifies in any quarter in 2020, the employer continues to qualify through the end of the quarter in which the gross receipts in 2020 are at least 80% of the gross receipts in the same quarter of 2019. 

Example:

Q2 2020                a 55% decline in gross receipts compared to Q2 2019

Q3 2020                a 25% decline in gross receipts compared to Q3 2019

Q4 2020                a 13% growth in gross receipts compared to Q4 2019

This employer qualifies in Q2 2020, since the decline was greater than 50% and continues to qualify in Q3 since the decline is still greater than 20%.  Since the employer qualified in Q3 2020, the employer automatically qualifies for Q4 2020.

2021

In order to qualify for this credit in 2021, the employer must have experienced a 20% or greater decline in gross receipts in a calendar quarter in 2021 as compared to the same quarter in 2019.

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The operation of the trade or business was fully or partially suspended due from orders from an appropriate governmental authority.

Gross receipts

Defined by the IRS in terms of the ERTC:  total sales (net of returns and allowance) and amounts received for services.  Also, income from investments and from incidental or outside sources, interest, dividends, rents, royalties and annuities.  Gross receipts do not include sales tax received or repayment of a loan. 

Credit Amount

2020

50% of the first $10,000 in qualified wages per employee.  Maximum credit per employee for 2020 = $5,000

2021

70% of the first $10,000 in qualified wages per employee PER QUARTER

Qualified Wages

Wages paid to an eligible employee and health insurance benefits paid for that employee during the qualifying quarter.

Disqualified Employees

Wages and health insurance benefits for a majority owner and the owner’s spouse are not included in qualified wages in terms of the ERTC.

Wages and health insurance benefits to the following relatives of the majority owner are not qualified wages in terms of the ERTC:

  • A child or a descendant of a child;
  • A brother, sister, stepbrother, or stepsister;
  • The father or mother, or an ancestor of either;
  • A stepfather or stepmother;
  • A niece or nephew;
  • An aunt or uncle;
  • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

A majority owner is an individual that owns more than 50% of the shares of a company.  Spouses who both own shares are considered one shareholder in terms of majority ownership. For example, if a husband owns 20% and a wife owns 40%, they are considered to be majority owners, as they own a combined 60% of the shares.

Interplay between the ERTC and other credits, loans and grants:

Wages paid with Payroll Protection Plan loans (PPP), Economic Injury Disaster Loans (EIDL) or any other grants cannot be included in the Employee Retention Tax Credit.

Wages for which you have taken qualified sick leave or family credits cannot be included in the Employee Retention Credit wages.

How to Claim

The ERTC is claimed on the Employer’s Quarterly Federal Tax Return (Form 941).  If Form 941 was filed without taking credit, an Amended Employer’s Quarterly Federal Tax Return or Claim for Refund (Form 941-X) would be filed.

Any ERTC claim for Q1 2020 (March 13, 2020 – March 31, 2020) would be included on the 2nd quarter 2020 return.

Following is a table showing the details of the ERTC for March 13, 2020 – December 31, 2020 and the entire year of 2021.

*This ERTC was to continue through the end of 2021.  However, it is important to note that there is new legislation that proposes terminating the ERTC for the fourth quarter.

Additional Information: IRS FAQs

If you need assistance to determine if you qualify or if you need assistance filing for this valuable credit, please reach out to Colleen Minnich, CPA at Billings & Company, CPAs at 440-365-9100.

Colleen Minnich