The employee retention tax credit is a refundable payroll tax credit originally invented in 2020 during the Covid 19 pandemic by the Coronavirus Aid Relief and Economic Security Act(CARES). It is designed to persuade firms to keep staff on the payroll while dealing with COVID-19’s unforeseen implications. A refundable payroll tax credit equivalent to a percentage of qualified salaries is available to eligible businesses. Initially, employers were not allowed to take out a PPP loan and claim the ERTC. Therefore, The Consolidated Appropriations Act included a much-needed change to the CARES Act, allowing all qualifying employers to claim the ERTC tax credit even if they had taken out a PPP loan. Moreover, the ERC was extended further under the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act and is now available to qualifying firms who kept staff during the pandemic until December 31, 2021.
The CARES Act 2020 stated that the credit could be used to 50% of eligible salaries earned between March 13 and December 31, 2020, up to $10,000 per employee per year, for companies who qualify, including first-time PPP beneficiaries.
The consolidated appropriations act of 2021 later extended to state that Employers who meet the requirements, including PPP participants, can claim a credit of 70% of eligible salaries paid. In addition, during the first two quarters of 2021, the payment amount that qualifies for the credit has been increased to $10,000 per employee each quarter.
The American rescue act 2021 stated that the credit stays at 70% of qualifying salaries up to a $10,000 cap every quarter, equating to a maximum of $7,000 per employee per quarter or $28,000 for the whole year of 2021. Particular start-up enterprises that started after February 15, 2020, and were forced to close due to government orders may be eligible for a credit of up to $50,000 each quarter under this statute.
Who qualifies for ERTC?
Most companies, including schools, universities, hospitals, and 501(c) organizations, can now qualify for the credit due to the American Rescue Plan Act’s passage. The Consolidated Appropriations Act previously broadened eligibility to include enterprises that obtained a PPP loan, including borrowers from the first round of PPP who were previously unable to claim the tax credit.
For qualifying employers, one of two variables determines qualification, and one of these characteristics must apply in the calendar quarter in which the credit is to be used:
- Due to a government order, trade or business was completely or partially halted or forced to restrict operating hours. The credit is only valid for the portion of the quarter in which the business is closed, not for the whole quarter.
- Gross receipts have decreased significantly for the employer.
What are the eligible wages under ERTC?
All earnings and health insurance benefits paid to an employee within the period the employer is designated an eligible employer are considered eligible wages under the ERTC for a small company.
Earnings and health insurance benefits provided to an employee who is not delivering services due to the pandemic impacts are acceptable wages under the ERTC for an eligible employer that is not deemed a small company.
Furthermore, qualifying earnings provided to this employee cannot exceed the amount such an employee would have been paid 30 days before the pandemic.
Wages paid for employment while the employer is assessed as an eligible employer from March 13, 2020, to December 31, 2020, are covered by this clause in 2020.
Wages under this provision for 2021 refer to wages paid for employment from January 1, 2021, to December 31, 2021, when the employer is regarded as an eligible employer.