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Small business owners, what would you say if I told you that your business could qualify for up to $19,000, per employee in a tax credit?
Pretty awesome, right? Well, here's the thing. You CAN qualify via the employee retention tax credit (ERTC).
ERTC came out, originally, as part of the coronavirus aid in March of 2020. However, at that time, you had to choose either PPP, or ERTC. For most, it was a simple decision to choose PPP, so ERTC went largely ignored.
However, when the Consolidated Appropriations Act of 2021 was recently passed, not only did it include an additional round of PPP funds, but it also included an update and extension to the ERTC. This new ERTC update and extension allows small business owners to qualify even if they received PPP funds.
I talked about this recently on this video podcast, but also am explaining it in writing here.
ERTC updates are retroactive to 2020, and ERTC has also been extended through the second quarter of 2021. The total amount of the credit available is $19,000 per employee! Now that I have your attention with the possibility of up to $19,000 per employee, let's see if you qualify.
First things first, this applies to businesses with W-2 employees. If you only pay contractors, this does not apply to your business.
2020 qualifications
In 2020, you could qualify in one of two ways.
1. If the government mandated that your business shut down either fully or partially. This does not mean that you chose to shut down because it was the right thing to do or seemed safer. It means the government actually told you that you had to shut down.
If that's the case, the next test for you is, whether you had more than 100 full-time employees in 2019. If you did, qualifying wages are those you paid to employees when they were NOT working.
If you averaged less than 100 full-time employees in 2019, then the wages you paid qualify, whether or not they were working. Wages paid with PPP funds do not qualify.
2. If your business experienced a 50% decline in gross receipts in any one quarter of 2020 relative to the same quarter in 2019.
If so, then wages paid during that quarter qualify as do wages in future quarters until the end of the quarter in which you have recovered to 80% of the corresponding 2019 gross receipts. This means that if you qualified for one quarter, you would automatically qualify for at least the next quarter.
Yes, I know it's confusing – even for us as CPAs! I've made a decision tree to help you in case you're a visual learner like I am. The government did not make this easy for us. This rule has a lot of nuances. However, remind yourself that up to $19,000 per employee in tax credits are available, so it's worth it to figure this out!
If you have a quarter in which your gross receipts for 2020 were 50%, less than 2019, then the next question is how many full-time employees you had in 2019. If you had greater than 100 full-time employees in 2019, the wages you paid to employees while they were NOT working, are qualified wages. If you had less than 100 employees, the wages you paid to qualified employees are eligible whether they were working or not.
After you have determined the quarters for which you qualify, you’ll next determine qualifying wages for each employee.
How much in ERTC can I qualify for in 2020?
Qualifying wages for 2020 are up to a maximum of $10,000, per employee for the year. The ERTC tax credit is available at 50% of those qualifying wages.
In order to calculate the credit by employee, you'll need to sum wages and applicable health costs paid and subtract any PPP funds used to pay to those employees. That qualifying wage number is then multiplied by 50% to determine your tax credit. Keep in mind that the maximum qualifying wage per employee is $10,000 for 2020. So, if an employee has compensation that is greater than that, you'll need to reduce it to $10,000. Thus, the total ERTC available for 2020 is $5,000 per employee. ($10,000 x 50%)
How about 2021. How do I qualify?
2021 is similar in many ways, with a few nuances. You also can qualify in two ways. T
1. If the government mandated that your business shut down either fully or partially in 2021. I hope that businesses will not have to be shut down in 2021 by mandate, but this is set in place in case it happens.
If that's the case, the next test for you is, whether you had more than 500 full-time employees in 2019. Yes, even though we are in 2021, we are still comparing to FTEs for 2019. Also, this is one of the changes for 2021. Instead of only qualifying for the best benefits, if you had less than 100 employees, it has now been extended to businesses that have less than 500 employees.
If you had more than 500 FTEs in 2019, qualifying wages are those you paid to employees when they were NOT working.
If you averaged less than 500 full-time employees in 2019, then the wages you paid qualify, whether or not they were working.
Wages paid with PPP funds do not qualify.
2. If your business experienced a 20% decline in gross receipts in the first or second quarter of 2021 relative to the same quarter in 2019. This is not a typo – we continue to compare to 2019. This is beneficial since your business may have recovered in 2021 relative to 2020, but still not be back to pre-pandemic gross receipts.
If your business did not experience a 20% decline in gross receipts for a quarter of 2021 relative to the same quarter of 2020, you may also look at the immediately preceding quarter to see if you qualify and, if you do, this will count as a qualification for the quarter you had not originally qualified for.
For example, if you did not qualify for Q1 of 2021, you could instead look at gross receipts in the fourth quarter of 2020 and compare them to gross receipts for the fourth quarter of 2019. If that fourth-quarter comparison showed a greater than 20% reduction, that would make the first quarter of 2021 qualify.
Does this sound complicated? Yes! The government has made this complicated. However, remind yourself, it's worth $19,000 per employee in tax credits. You are a smart business owner. You will figure this out. I do highly recommend working with a professional for this as well as your payroll processor.
I have made a visual decision tree to help you. I love to simplify things as much as possible.
Now that we know that you have a quarter that qualifies, we need to figure out which wages qualify. Once again, we go to the number of full-time employees you had in 2019. If you had greater than 500 full-time employees in 2019, then only wages you paid when they were NOT working qualify.
If you had less than 500 full-time employees in 2019, then the wages you paid are eligible, regardless of whether or not they were working.
Keep in mind that any wages paid with PPP funds do not count as qualified wages.
Now that you know which quarters your business qualifies for, you need to perform the calculation. Just like in 2020, you will determine compensation paid per employee plus health costs. Next, you deduct any portion paid with PPP funds.
In 2021, however, qualified wages are up to a maximum of $10,000 per employee per quarter, rather than just $10,000 per year. Not only that, but the tax credit is 70% of those qualified wages, rather than the 50% offered in 2020.
This means the total eligible tax credit for 2021 is $7,000 per employee per quarter, for a total of $14,000 ($10,000 x 70% for quarter 1 and 2 of 2021). $14,000 available for 2021 plus $5,000 available for 2020 means that you have a total of $19,000, per employee available in tax credits.
Yes, I know this is complicated. But it's worth it.
I have prepared an Estimated ERTC Plug & Play Interactive Calculator where you can input your business's numbers to get a sense of how much money you may qualify for. Sign up to have the Decision Trees and Calculators sent to your email HERE for $27.
Please work with a professional. And with your payroll processor in order to determine the amount you qualify for.
STRATEGY MATTERS! (strategy is my FAVE!)
Because we haven’t yet completed the first two quarters of 2021 nor have you applied for PPP forgiveness, this is an important time to BE STRATEGIC in decision making for your business. Since PPP funds must be subtracted for purposes of this credit, perhaps your business should apply for forgiveness using some of the other available covered costs.
You’ll also want to be strategic in determining the time period claimed as the covered period for PPP. Some of you may want to take the shortest period available so that you have an entire period without any PPP funds to apply while others (who have higher paid employees) may prefer to stretch the covered period out longer. This is a strategic decision that you should make to best benefit your business. This is the type of strategy I am passionate about and love to see you make the very best choice you can.
Okay, how do I get the money?
I'm glad you asked. That's the important part! Now that you know you qualify for the money, you need to actually get it.
For 2020, you'll need to file an amended 941. You can also opt to file a form 7200 if you need advanced funding. For 2021, you haven't yet filed your quarterly 941, so you'll need to work with your payroll processor to be sure they're aware of the amount that you will be claiming so that you don't actually pay that amount. Again, you could file a form 7200, if you needed advanced funds.
This is not a tax deduction. This is a tax credit. This is dollar for dollar money for your business.
I want you to take advantage of this free gift from the government to support your small business if you are eligible. Please work with a professional, to be sure that you understand the calculation and complete the forms so that you can get this money back.
I’m offering a limited number of personalized ERTC consultation calls. If you are interested, you may schedule a consultation HERE or when you download the ERTC decision tree and calculator.
Our team at VICTORY Advisory Services is here cheering you and your team on and supporting you in your small business!
Are you as excited about this as I am for you?!! I am truly so happy thinking about the difference this money can make for your small business.
Comment below, connect with me on Facebook, LinkedIn, or Instagram, or email me. If you haven't already joined our free private Facebook group, Small Business Finance SIMPLIFIED, why not? Join us! I love to meet new people!
Cheering you on!
Joyfully,
Christie
Christie Varner, a 25-year CPA, is passionate about helping YOU, small business owner, gain confidence & take control of your business finances so that you can achieve your financial goals without sacrificing your happiness.
When she's not empowering business owners, she's eating Tex Mex, drinking coffee, playing with her Havanese dog, Max, or learning something (and will teach others soon!) from Google, YouTube or a book!
She'd love to connect with you so reach out & say hi!