You’re likely familiar with the Employee Retention Tax Credit (ERTC), either because you’ve heard about lucrative payouts or you’ve seen or heard an ad about it. The ERTC is a refundable payroll tax credit that was introduced in the CARES Act in 2020 and subsequently updated by the Taxpayer Relief Act, the American Rescue Plan, and the Infrastructure and Jobs Act.
There are two ways to qualify for the ERTC, including the gross receipts test and the suspended operations test. While I’ve covered the suspended operations test, I’m going to cover the gross receipts test in this article.
The gross receipts test is the most straightforward way to qualify for the Employee Retention Tax Credit though the specific definition of “decline” is different for 2020 and 2021.
For 2020, you can qualify for the ERTC if your gross receipts for any quarter decreased by at least 50% when compared to the corresponding 2019 quarter.
In 2021, you can qualify for the ERTC if your quarterly gross receipts decreased by 20% or more when compared to the same quarter(s) in 2019.
The IRS defines gross receipts as “the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses.”
Gross receipts generally include the following types of income:
There can be nuances in the definition of gross receipts at the state level so be sure to consult with your accountant to determine whether other income not listed above is included in your company’s gross revenue.
The IRS’ Revenue Procedure 2021–33 specifies that Shuttered Venue Operator Grants, Restaurant Revitalization Funds (RRF), and similar loans may not be counted as gross income when determining eligibility for the ERTC. Also, PPP loan recipients may still claim the ERTC as long as the wages used to qualify for the PPP are not included in the ERTC calculations.
Additionally, IRS Notice 2021–23 and IRS Notice 2021–49 both explain that qualified wages may not be calculated using wages connected to the following:
In Notice 2021–23, the IRS describes how employers that did not exist in 2019 may use corresponding 2020 quarters to qualify for 2021 quarters. For example, under the alternative quarter election rule, you can compare the second and third quarters of 2021 to the second and third quarters of 2020, instead of 2019. If there is a qualifying revenue decline of 20% or more, you are considered an eligible employer for the ERTC.
Notice 2021–49 also extends the alternative quarter election rule to businesses that qualify as a “severely financially distressed employer.” According to the IRS, a “severely financially distressed employer” is one who experiences a decline of 90% or more in any 2020 or 2021 quarter when compared to the corresponding 2019 quarter. Severely financially distressed employers that did not exist in 2019 may alternatively compare the corresponding 2020 quarter.
Once you’ve determined that you’re eligible for the ERTC under the gross receipts test, you can start figuring out your qualified wages.
Here are the steps to calculate your qualified wages for the ERTC:
Here’s how to determine your qualified wages:
Generally, you can count any wages subject to FICA taxes, as well as qualified health expenses, that were paid between March 12, 2020 and September 30, 2021 (for Recovery Startup Businesses, this ending period if December 31, 2021).
Qualified health expenses typically include only the employer and the employee’s pre-tax portion, not any after-tax amounts.
When you’re determining your qualified wages, remember to count the wages of qualified full-time employees. The IRS defines a qualified “full-time employee” as follows (IRS Notice 2021–49):
“The term ‘full-time employee’ means an employee who, with respect to any calendar month in 2019, had an average of at least 30 hours of service per week or 130 hours of service during the month (emphasis added).”
Once you’ve determined your company’s number of qualified employees in 2020 and 2021, it’s time to determine the amount of qualified wages you can use to determine your potential ERTC amounts.
- 2020 ( 100 employees or fewer): You may claim the ERC for up to 50% of wages paid to working and non-working staff during your eligible periods.
- 2020 (over 100 employees): You may only claim the ERC for wages paid to non-working staff members during your eligible periods.
- 2021 (500 employees or fewer): You may claim the ERC for up to 70% of wages paid to working and non-working staff in eligible quarters.
- 2021 (over 500 employees): You may only claim the ERC for up to 70% of wages paid to staff who did not work during your ERC-eligible periods.
IRS Notice 2021–49 clarifies that tips can be included in qualified wage calculations if they are subject to FICA. If an employee’s tips exceed $20 in a calendar month, the total tip amount for that month can be included when calculating qualified wages. On the other hand, if an employee’s total tips for a calendar month are less than $20, they are not subject to FICA and would consequently not be countable for the ERTC.
The IRS FAQs about the ERTC (FAQ #59) specifies that wages for individuals related to the majority owner cannot be included in qualified wages.
Related individuals include:
Notice 2021–49 specifies that, if an individual is considered a majority owner, their wages cannot be included in qualified wages for the ERTC. The owner-spouse rules for qualified wages apply to all quarters in which the ERTC is available.
The Employee Retention Tax Credit program officially ended on September 30, 2021 for all businesses except for Recovery Startup Businesses. However, you can amend your payroll tax return for any ERTC-eligible quarters for up to 3 years from the date you filed your original payroll return.
The deadlines for retroactively claiming the ERTC using an amended payroll tax return (Form 941-X) are:
Many tax advisors are mistakenly saying the ERTC expires on July 31, 2023 or March 12, 2023 because they believe the statute of limitations to be three years form the payroll return filing date. But, the instructions provided by the IRS for Form 941-X dispel this misconception:
"Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later. You may correct underreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date the Form 941 was filed. We call each of these time frames a “period of limitations.” For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date."
We’d love to help you explore your ERTC eligibility and claim it for your business. Since the ERTC was announced in 2020, we’ve helped our eligible clients claim it for their businesses and use it to revitalize their operations and recover after COVID-19. Here are a few recent results:
You can learn more about our ERTC services here.
