Navigating IRS Guidelines: Who is Eligible for the Employee Retention Tax Credit

The new stimulus package, signed into law on December 27, 2020, has several provisions that will impact small business owners. One of the provisions that will provide relief for employers to help retain their employees is the employee retention tax credit (ERTC). The ERTC is a refundable tax credit that employers can apply against their employment taxes for eligible wages paid from March 13, 2020, through December 31, 2021.

The ERTC is aimed at employers who were impacted negatively by the COVID-19 pandemic, and who experienced either a partial or full shutdown of their business due to government orders or a significant decrease in gross receipts.

Navigating through the IRS guidelines for eligibility to claim the ERTC and calculating the credit amount can be overwhelming. However, understanding the guidelines and qualifying criteria can help you determine if your business is eligible for this valuable credit.

Eligibility Criteria for Employers

To be eligible for the ERTC, an employer must be carrying on a trade or business and meet one of two criteria:

1) The business must have been fully or partially suspended during the quarter due to government orders related to COVID-19, or

2) The business must have experienced a significant decline in gross receipts during the quarter.

Fully or Partially Suspended

To qualify for the ERTC, a business must have been fully or partially suspended during the quarter due to government orders related to COVID-19. A business is considered fully or partially suspended if the operation of its trade or business is fully or partially suspended by a government order due to COVID-19, such as a mandatory shutdown order.

Significant Decline in Gross Receipts

Alternatively, a business may qualify for ERTC if it experienced a significant decline in gross receipts. The significant decline in gross receipts means that the employer’s gross receipts for a calendar quarter in 2020 were at least 50% less than the gross receipts for the same quarter in 2019. Employers can also use the same period in 2019 to 2020 or the preceding quarter in 2020 to calculate the gross receipts’ decline.

ERTC Calculation

The credit amount is calculated as 50% of the qualified wages paid to an employee from March 13, 2020, through December 31, 2021, up to $10,000 of qualified wages per eligible employee. This means that the maximum amount of the credit could be up to $5,000 per employee.

Qualified wages include the employer’s health plan expenses paid or incurred during the period. However, employers cannot claim the ERTC for wages used to generate Paycheck Protection Program (PPP) loan forgiveness.

Final Thoughts

Navigating the ERTC guidelines can be challenging. However, the relief offered through the ERTC can be substantial, providing small business owners with a valuable opportunity to recover from the financial impact of the COVID-19 pandemic. Employers must assess their eligibility, calculate the credit amount, and ensure they are following the IRS guidelines to avoid penalties. Additionally, they can seek the guidance of a tax advisor or accountant for assistance in navigating the ERTC guidelines.