Employee Retention Tax Credit (ERTC)

Private businesses or tax-exempt organizations that conduct a trade or business that experience one or both of the following criteria:

• The business was forced to partially or fully suspend or limit operations by a federal, state or local governmental order
• The business experienced a 50% decline in gross receipts during any quarter of 2020 versus the same quarter in 2019, and/or a 20% decline in gross receipts 2021 against the same quarter in 2019.

Note: if your business started in 2020, you will use 2020 as your comparison period when applying for the tax credit in 2021.

The ERTC is available to businesses of all sizes – there is no cap on employees, although it is easier for small businesses to take advantage.

A government body ordered your business to either cease all operations, or continue with some, but not all of normal operations.

A partial suspension means that a “more than nominal” portion of business operations were suspended by a government order. For example, if a restaurant is ordered to cease indoor dining in Q2 of 2020, it may achieve eligibility through this provision if:

• Indoor dining accounted for at least 10% of the business’ revenue during the corresponding quarter in 2019, in this case, Q2 2019; or
• Indoor dining accounted for at least 10% of the business’ personnel hours during the corresponding quarter in 2019.

Note that full or partial suspension relates to how a business conducts their activities, not its revenue. A business can be eligible for the ERTC under this provision even if their revenue increased during the applicable quarter. 

Unlike the gross receipts eligibility, the suspension of operations provision only applies during the time when your business is affected by the government order in question. In other words, your business may only be eligible for a partial quarter under this provision. 

Archived Health Orders and Directives from the San Francisco Department of Public Health can help provide details on what activities San Francisco limited and for how long.

IRS Notice N2021-20 provides significant detail on what constitutes a full or partial suspension of operations. Businesses should consult that document to make an informed determination, paying special attention to FAQs #17 and #18.

The ERTC eligibility rules are different in 2020 and 2021.

• In 2020, businesses with 100 or fewer full-time employees may include qualified wages for all employees when calculating the credit. If a business had more than 100 employees in 2019, they can only include qualified wages paid to an employee during a period where that employee was not providing services to the business but was still receiving qualified wages.
• In 2021, that threshold is raised to 500 or more full-time employees.

Includes all forms of wages that are subject to FICA taxes (taxes withheld from paychecks to fund Social Security and Medicare). Additionally, qualified wages may include the employer’s health plan expenses properly allocable to the wages.

Note that there are certain employees that should not be considered for qualified wages under most circumstances, including:

• An individual who owns more than 50 percent of the business
• A grantor, beneficiary, or fiduciary of the employer
• A family relative of the employer (if the employer is an individual), as well as spouses or household employees.

The IRS has also clarified that tips may be considered qualified wages for the purposes of ERTC, as long as they are Medicare wages.

A business may not “double benefit” by utilizing the same wages for claiming the ERTC and:

• Families First Coronavirus Response Act (FFCRA)
• American Rescue Plan Act of 2021 Leave Credits
• Work Opportunity Tax Credit (WOTC)
• Research and Development Credit (R&D)
• Forgiveness on a PPP loan

If your business received a PPP loan, you may still be eligible for the ERTC.

But, you cannot use wages applied to your PPP loan forgiveness to your ERTC. If you haven't yet applied for PPP loan forgiveness, consider applying non-payroll expenses to that so that you can maximize the wages that you can use to claim your ERTC.

First, work with an accountant to determine your eligibility.

Next, determine the total qualified wages, including allocable qualified health plan expenses, paid to each employee per quarter. Remember, do not include wages that have been used toward PPP forgiveness.

Then, calculate qualified wages paid to each employee in 2020, apply a cap of $10,000 of qualified wages per employee across all quarters combined. Multiply the qualified wages up to the annual cap by 50% to determine your credit amount for 2020. The maximum is $5,000 per employee for the entire year.

For 2021, calculate qualified wages paid to each employee in Q1, Q2 and Q3, apply a cap of $10,000 of qualified wages per employee per individual quarter. Multiply the qualified wages up to the quarterly cap by 70% to determine your credit for each quarter in 2021. The maximum is $7,000 per employee per quarter.