History and Timeline of the ERTC
June 6, 2022
Section 2301 of the CARES Act provided a refundable payroll tax refund (ERTC) for companies whose business was impacted by Covid-19. The credit was applicable to qualified wages paid after March 12, 2020, and before January 1, 2021.
Soon after, The Taxpayer Certainty and Disaster Tax Relief Act of 2020 amended the CARES Act to extend the ERTC through the first two quarters of 2021.
Additional changes to the ERTC were made under section 9651 of the American Rescue Plan Act of 2021. Most notably, the ARPA extended ERC eligibility for the last two quarters of 2021. Thus, employers were eligible for the ERC on qualified wages paid after March 12, 2020, and before January 1, 2020.
Unfortunately, the Infrastructure Investment and Jobs Act signed on November 15, 2021, brought an early sunset to the ERTC. The IIJA only impacts the fourth quarter of 2021. The ERTC is still eligible to be claimed retroactively for any qualified wages paid after March 12, 2020, and before October 1, 2021.
What companies are eligible for the ERTC?
The employee retention credit is available only to companies that are eligible employers. Section 2301(c)(2)(A) of the CARES Act defines an “eligible employer” as an employer carrying on a trade or business during the calendar year 2020 and/or 2021, and meets one of the following tests for any calendar quarter:
- The operation of the trade or business carried on during the calendar year 2020 is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19.
- Such calendar quarter is within the period in which the employer had a significant decline in gross receipts, as described in section 2301(c)(2)(B) of the CARES Act.
What are Qualified Wages?
Qualified wages are wages and compensation paid to certain employees between March 13, 2020, and June 30, 2021. Qualified wages include the eligible employer’s qualified health plan expenses.
If the eligible employer averaged more than 100 full-time employees in 2019 (for 2020 wages) or more than 500 full-time employees in 2019 (for 2021 wages), qualified wages are limited to the wages paid to the employee for the time that the employee is not providing services due to the circumstances causing the employer to be an eligible employer.
If the eligible employer averaged less than 100 full-time employees in 2019 (for 2020 wages) or less than 500 full-time employees in 2019 (for 2021 wages), then generally any wages paid to an employee are qualified.
2020 Credit Information
The ERTC for 2020 is 50% of qualified wages up to $10,000. Thus, the maximum credit for 2020 is $5,000. Unlike 2021, the credit does not reset each quarter.
2021 Credit Information
The ERTC for 2021 is 70% of qualified wages up to $10,000 per quarter. Thus, the maximum credit for each eligible quarter in 2021 is $7,000. The max ERTC per employee in 2021 is $21,000 ($7,000 per quarter).
Originally, PPP recipients were disqualified from claiming the ERTC, but new legislation has brought change. PPP recipients are eligible, but any wages paid through the PPP loan are not classified as “qualified wages” and thus not eligible for the ERTC. If a company used up their PPP loan, then wages would once again be qualified, and the ERTC could be claimed.
Unfortunately, wages paid to majority owners are not qualified wages. Additionally, wages paid to any individual who is deemed to “constructively” own 50% or more of said company are not qualified. Constructive ownership rules are outlined in I.R.C 267 and I.R.C 152.
Severely Financially Distressed Business
The IRS labels a business as “Severely Financially Distressed” if their gross receipts are less than 10% than the receipts of that quarter in 2019. This rule is particularly applicable for Large Eligible Employers because it allows them to treat all wages as qualified wages.
Recovery Startup Business
Section 3134(c)(5) of the Code defines a “recovery startup business” as an employer (i) that began carrying on any trade or business after February 15, 2020, (ii) for which the average annual gross receipts of the employer (as determined under rules similar to the rules under section 448(c)(3) of the Code) for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined does not exceed $1,000,000, and (iii) that is not otherwise an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. Section 3134(b)(1)(B) provides that in the case of an eligible employer that is a recovery startup business, the amount of the credit allowed under subsection 3134(a) (after application of the limit under subsection 3134(b)(1)(A)) for each of the third and fourth calendar quarters of 2021 cannot exceed $50,000.
Info Needed For Customer Intake
In order to qualify for the ERTC there is some basic information that we need to gather to determine the potential credit a customer can receive. In short, the form 941 has most of the information that we will need.
- Business name
- Contact name
- Type of business
- Phone Number
- Was your business affected by Covid-19 mandates in 2020 and 2021?
- How was your business affected by Covid-19 in 2020 and 2021?
- How many W2’s did you issue in 2020 and 2021?
- What was your 2020 and 2021 Quarterly Gross Wages (Form 941)?
- What was your average number of W2 employees in 2019 and 2020?
- Did you receive a PPP Loan?
- Did you begin carrying on your business after February15, 2021 (Recovery Startup Business)