With the passage of the Coronavirus Aid, Relief, and Economic Security Act (CARES) in March of 2020, the main focus for business financial relief centered on the Payroll Protection Program. The goal of the program was to get money quickly to small businesses financially impacted by COVID-19, especially during the Spring 2020 government-mandated business closures. The application process was rapid and business owners could simply work with their local bankers to apply and obtain a loan. For most small businesses, it was easy to obtain loan forgiveness later in 2020.
But there was another program introduced in the CARES Act called the Employee Retention Tax Credit (ERTC). This credit has the potential to deliver much-needed additional funds to businesses impacted by the COVID-19 pandemic. Terri Kirby, head of tax filing and compliance for Asure Software, explained that “initially, the PPP loan was out there and the intent was to get money to the small business owner quickly, so they could retain their employees and maintain their business for the recovery. We thought that COVID wasn’t going to last the whole year…The Employee Retention Credit was for those employers that were still trying to work and maintain their employees or a bit larger group of employers actually paying employees to not work while they waited for government shutdowns to be eased.”
Over the past year, the rules governing eligibility for the ERTC have been changed and expanded twice, and now more employers can qualify for the credit. Let’s learn more about the Employee Retention Tax Credit, including how it is structured, who qualifies, and how much money is potentially at stake.
The ERTC was created as a way for small businesses to be able to retain employees temporarily who were not able to work due to the COVID-19 government-mandated shutdowns. The intention was to keep people on payrolls so that businesses could bring them back into the workplace quickly when the emergency was over. However, as the pandemic dragged on, the ERTC was extended by Congress to help businesses continue to get back on their feet.
Three major pieces of legislation establish the rules governing the ERTC.
Coronavirus Aid, Relief, and Economic Security Act (CARES) Act, enacted March 2020
The Consolidated Appropriations Act (CAA), enacted in December 2020
American Rescue Plan Act (ARPA) enacted in March 2021.
If your small or midsize business qualifies, there could be significant funding available in ERTC. The amount of the credit has been adjusted by the different pieces of legislation.
In the CARES Act, if you had 100 or fewer employees, business owners could take 50% of the first $10,000 of wages and healthcare benefits paid to an employee across all quarters from March through December 2020. So, the maximum credit obtainable in 2020 was $5,000 per employee. If your business is willing to file amended returns for 2020, you might still have the opportunity to claim this credit.
The CAA and ARPA extended the ERTC to apply to January through December of 2021 and expanded the amount of the credit possible. Now, businesses can claim 70% of the first $10,000 in qualified wages for each employee in every quarter, or up to $28,000 per employee during 2021. Whether you have 10 employees or 50, that can add up to significant funds, as you can see:
If you have 10 employees: (10 emp) * ($5k + $28k) = $330,000
If you have 50 employees: (50 emp) * ($5k + $28k) = $1.65 million
There are three main requirements governing which businesses can claim ERTC. See the above chart for a quick comparison of the eligibility requirements, as they evolved through the three key pieces of legislation. The main eligibility criteria are:
PPP status: Under the CARES Act, if a business had applied for and received a PPP loan, it could not also receive ERTC. However, the CAA and ARPA changed that rule, allowing businesses to now take advantage of both PPP loans and ERTC. However, you must avoid “double-dipping” with these programs. Therefore, you cannot claim ERTC for employee wages that you paid using funds from a PPP loan.
Company size: First, businesses must not be too big to qualify. Under CARES, that meant you had to have 100 or fewer employees. But CAA expanded eligibility to businesses with 500 or fewer employees, and ARPA continued with that amount. As a result, many mid sized businesses may be eligible for ERTC now.
Pandemic impact: Next, qualifying businesses need to be able to show a substantial negative impact from the pandemic. Under the CARES Act, this could happen in one of two ways:
Disruption by government stay-at-home orders – Many non-essential businesses were impacted by government mandated shutdowns during 2020. If your business is restricted in terms of capacity but is technically still open, does that count in terms of government disruption? Clearly, this type of governmental restriction represents some sort of partial disruption, but in this case, you may want to fall back on your gross receipts test.
Decline in gross receipts – Under the CARES Act, you could qualify for ERTC if you could show that your business suffered a decline in 2020 gross receipts of more than 50% when compared to the same period in 2019. The CAA and ARPA lowered the impact businesses had to demonstrate in 2021. This year, you can qualify if your business shows a reduction of more than 20% in gross receipts. For gross receipts eligibility, you need to look quarter by quarter, comparing 2020 to 2019. So for example, if in Q1 2019 gross receipts came in at $100,000 and in Q1 2020 you received only $49,000, your business is eligible for ERTC. For 2021, compare Q1 2021 to Q1 2019 and if your gross receipts are less than 80% of what they were in 2019, your business qualifies for ERTC. 
To calculate the amount of the credit for each employee, you must first determine their amount of qualifying wages. These are regular wages that would not be disqualified for double-dipping. In other words, the wages could not have been paid with a PPP loan (draw 1 or 2) nor could the wages be claimed as paid-leave under the Families First Coronavirus Relief Act (FFCRA), since employers received Federal reimbursement for that leave.
The government has stated the intention to investigate and enforce compliance in regard to all of the COVID-19 business programs, as demonstrated by the DOJ charging more than 200 fraud cases associated with PPP loans already. Businesses must take care to avoid double-dipping with FFCRA paid-leave or PPP wages when you determine ERTC qualifying wages. With ARPA, employers will be held responsible for double-dipping and there will be penalties. Instead of the agency looking back three years to search for violations, the look back will be extended to five years.
For many, the Employee Retention Tax Credit represents the next-to-largest business stimulus in U.S. history behind PPP loans. In the wake of ARPA, small and mid size businesses have a lot potentially at stake. You will want to maximize ERTC while also staying in full compliance with this complex legislation.
The experienced team at Payroll Medics can help you maximize your tax credits with our ERTC service.
Reach out to a friendly Payroll Medic here to get started with receiving bottom line boosting tax credits.
