The Employee Retention Tax Credit (ERTC) was created to help businesses stay open and keep employees on their payroll during the COVID-19 pandemic. Originally part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in March of 2020, the ERTC is a refundable credit that businesses can take against payroll taxes to help offset some of their pandemic losses.
Since the beginning, the ERTC has seen major changes and expansions. The American Rescue Plan Act (ARPA) included a new benefit that can help startups take advantage of the credit. The Infrastructure Investment and Jobs Act (IIJA) retroactively ends the ERTC as of Sept. 30, 2021, one quarter earlier than anticipated, unless the employer is a recovery startup business. We’ll dig into these items below.
The American Rescue Plan Act’s new benefit for startup businesses
The ARPA created a third path of eligibility for the ERTC in the third and fourth quarters of 2021 only – a “recovery startup business.” To be an eligible recovery startup business a company must:
- Have started a new trade or business after Feb. 15, 2020.
- Have average annual gross receipts of no more than $1 million for the three-year period ending Dec. 31, 2020.
If a business meets these two criteria to be an eligible recovery startup business, they do not have to meet one of the two existing tests:
- Were forced to shut down or partially suspend by an appropriate governmental authority.
- Gross receipts were less than 80% of the gross receipts for the same quarter in 2019.
Recovery startup businesses can claim the ERTC subject to a cap of $50,000 per quarter – a potential benefit of $100,000 over both quarters.
For example, assume a recovery startup business does not meet the gross receipts or the government shutdown tests and has 10 employees in the third quarter that each make $10,000. The business would be eligible for the max recovery startup credit of $50,000 (10 employees x $10,000 x 70% = $70,000; however, the credit is capped at $50,000). This same business could also take the credit up to $50,000 again in the fourth quarter.
A few additional points to consider with the recovery startup business guidelines:
- The business may be an entirely new company, but it can also be a new trade, product, or service within an existing business.
- Even if a business has received a second Payroll Protection Program (PPP) loan, they can still qualify for the recovery startup ERTC.
- If a business qualifies as a recovery startup business, they can still qualify for the ERTC in 2021Q3 using the other two criteria which could be more advantageous. Continuing our example from above, if that business was also subject to a government shutdown for all of Q3, a larger credit of $70,000 would be available under the non-startup ERTC since the recovery startup ERTC is capped at $50,000 per quarter.
- The ERTC is a refundable payroll tax credit claimed on a business’ quarterly Form 941 filing. The IRS will send the business a check for any refund owed on the filing.
The Infrastructure Investment and Jobs Act (IIJA) retroactively ends the ERTC
Prior to the enactment of the IIJA, the law allowed a 70% credit on up to $10,000 in eligible wages per employee per quarter for all of 2021 if an employer met one of the two criteria previously mentioned above. As a result, an eligible employer could receive up to $28,000 in credits per employee for the year ($10,000 quarterly wage max x 70% x 4 quarters). The IIJA terminates this credit program on Sept. 30, 2021 except for recovery startup businesses. Recovery startup businesses, as defined above, are still eligible for the ERTC in 2021 Q4.
These recent changes and enhancements to the ERTC could be a game-changer for many businesses, especially startups.
Anders CPAs + Advisors works with startups and entrepreneurs on their financial needs so they can focus on what they do best. Learn more about the Anders Startup Group and contact an Anders advisor for assistance in taking advantage of the ERTC.
Every day at Anders, we serve as a catalyst for those striving to achieve their highest potential, and carry this mentality on to our clients and community. Through a collaborative approach and a combination of tax, audit and advisory services, we help our clients achieve their goals.
As a tax senior manager at Anders, Josh Snyder works with startup companies, athletes and high net-worth individuals on strategic tax planning and compliance and helps lead the Startup and Entrepreneurial Group. He enjoys working on tax planning opportunities for entrepreneurs and early-stage companies in the initial years of the business.
