CARES Act Details

The American Rescue Plan Act stipulates that the nonrefundable pieces of the employee retention tax credit will be claimed against Medicare taxes instead of against Social Security taxes as they were in 2020. However, this change will only apply to wages paid after June 30, 2021 and will not change the total credit amount. If the credit exceeds the employer’s total liability of the portion of Social Security or Medicare, depending on whether before June 30, 2021 or after in any calendar quarter, the excess is refunded to the employer. At the end of the quarter, the amounts of these credits will be reconciled on the employer’s Form 941.

The IRS Notice 2021-20 provides guidance for employers claiming the Employee Retention Tax Credit. However, the notice only provides guidance for the credit as it applies to qualified wages paid between March 12, 2020 and Sept. 30, 2021. Included within is guidance for how employers who received a PPP loan can retroactively claim the ERTC.

In order to claim the credit for past quarters, employers must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the applicable quarter(s) in which the qualified wages were paid. The IRS states that expenses eligible for PPP forgiveness that were not included in the loan forgiveness application cannot be factored in after the fact. Therefore, it’s important to ensure all eligible expenses, including non-payroll costs such as utilities, rent and operations expenses are included on PPP loan forgiveness applications in order to maximize the qualified wages available for ERTC.

Most employers, including colleges, universities, hospitals and 501(c) organizations following the enactment of the American Rescue Plan Act, can qualify for the credit. The Consolidated Appropriations Act expanded qualifications to include businesses who took a PPP loan, which are borrowers from the initial round of PPP who originally were ineligible to claim the tax credit.

Qualification is determined by one of two factors for eligible employers — and one of these factors must apply in the calendar quarter the employer wants to utilize the credit: A trade or business that was fully or partially suspended or had to reduce business hours due to a government order. The credit applies only for the portion of the quarter the business is suspended, not the entire quarter.

Some businesses however, based on IRS guidance, generally do not meet this factor test and would not qualify.

• Those considered essential, unless they have supply of critical material/goods disrupted in manner that affects their ability to continue to operate.
• Businesses shuttered but able to continue their operations largely intact through telework.

However, any of these businesses still may qualify for the credit with the second factor test.

• An employer that has a significant decline in gross receipts.

Generally, if gross receipts in a calendar quarter are below 50% of gross receipts when compared to the same calendar quarter in 2019, an employer would qualify. Employers are no longer eligible if in the calendar quarter immediately following the quarter their gross receipts exceed 80% compared to the same calendar quarter in 2019.

In 2021, businesses must be impacted by forced closures or quarantines or have seen more than 20% drop in gross receipts in the quarter compared to the same quarter in 2019. If you are a new business, the IRS allows the use of gross receipts for the quarter in which you started business as a reference for any quarter which they do not have 2019 figures because you were not yet in business.

American Rescue Plan Act – 2021

In addition to eligibility requirements under the Consolidated Appropriations Act, 2021, business also have the option of determining eligibility based on gross receipts in the immediately preceding calendar quarter (compared with the corresponding quarter in 2019).

Recovery Startup Business

• 3^rd and 4^th quarter 2021 only —Those entities that qualify may be entitled to up to $50,000 for each quarter.

To qualify as a Recovery Startup Business, one must:

• Have begun carrying on trade or business after Feb. 15, 2020
• Have annual gross receipts that do not exceed $1 million
• Not be eligible for the ERTC under the other two categories, partial/full suspension of operations or decline in gross receipts

The IRS notice 2021-49 clarified that Recovery Startups may use all qualified employee wages for purposes of the credit, regardless of the number of employees.

Form 941-X will be used to retroactively file for the applicable quarter(s) in which the qualified wages were paid.

Sachem Financial focus and expertise helps businesses not only understand whether they would be eligible for the ERTC, we guide and provide a comprehensive fee-based service from start to end. This includes support for eligibility, filing, ERTC funding (net of fee) and documentation for audit support.

Wages/compensation, in general, that are subject to FICA taxes, as well as qualified health expenses qualify when calculating the employee retention tax credit. These must have been paid after March 12, 2020 and qualify for the credit if paid through Sept. 30, 2021 (Recovery Startup Businesses had until Dec. 31, 2021).

The credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP.

When determining the qualified health expenses, the IRS has multiple ways of calculating depending on circumstances. Generally, they include the employer and employee pretax portion and not any after-tax amounts.

When determining the qualified wages that can be included, we will help first determine the number of full-time employees.

For the purposes of the employee retention credit, a full-time employee is defined as one that in any calendar month in 2019 worked at least 30 hours per week or 130 hours in a month and the definition based on the employer shared responsibility provision.

CARES Act – 2020

Those who have more than 100 full-time employees can only use the qualified wages of employees not providing services because of suspension or decline in business. Furthermore, any wages paid for vacation, sick or other days off based on the employer’s current policy cannot be included in qualified wages for the larger employers. Basically, employers can only use this credit on employees who are not working.

Employers with 100 or fewer full-time employees can use all employee wages — those working, as well as any time paid not being at work with the exception of paid leave provided under the Families First Coronavirus Response Act. Leave under FFCRA included paid sick leave and family leave, which when taken under the provisions of the act offered businesses an opportunity to claim a tax credit.

Consolidated Appropriations Act – 2021

This law increased the employee limit to 500 for determining which wages are applicable for the credit.

American Rescue Plan Act – 2021

This law allowed certain hardest-hit businesses — severely financially distressed employers — to claim the credit against all employees’ qualified wages instead of just those who are not providing services. These hardest hit businesses are defined as employers whose gross receipts in the quarter are less than 10% of what they were in a comparable quarter in 2019 or 2020. This only applies to the third quarter of 2021 for businesses that aren’t Recovery Startup Businesses.

Employers who take the employee retention credit cannot take credit on those same qualified wages for paid family medical leave.

If an employee is included for the Work Opportunity Tax Credit, they may not be included for the employee retention credit.

Remember, the credit can only be taken on wages that are not forgiven or expected to be forgiven under PPP.

American Rescue Plan Act — 2021

Shuttered Venue Operators Grant (SVOG) or Restaurant Revitalization Fund (RRF) recipients may not consider payroll costs with either program to justify qualified wages for the employer retention tax credit in the third quarter 2021 (Recovery Startups still have the fourth quarter). Eligible employers receiving these grants must retain records justifying where the funds were used. The funds must be used for eligible uses no later than March 11, 2023 for RRF while the SVOG latest date is June 30, 2022.