The ERTC is a refundable credit that companies can request on qualifying salaries, including certain health insurance costs, paid to employees. The IRS has indicated that the ERC is not included in gross income for federal income tax purposes. However, the ERC does reduce the expenses that an eligible employer could otherwise deduct on their federal income tax return (that is, the possibility of receiving part of the ERC by reducing federal income tax deposits may be the livelihood that some companies need to survive). The amount of the credit is calculated based on a percentage of “qualified wages,” including the attributable qualifying health plan expenses that an eligible employer pays to employees.
Eligible employers are entitled to an employee retention credit based on the qualified wages paid to their employees. While the Employee Retention Tax Credit (ERTC) program has officially expired, this does not affect a company's ability to apply for the ERTC retroactively. In addition, if the eligible employer is a corporation, then a related person is any person who maintains a relationship described above with a person who owns, directly or indirectly, more than 50 percent of the value of the corporation's outstanding shares. Employer U has the right to treat 80 percent of the wages paid as qualified wages and to request an employee retention credit for 80 percent of the salary paid.
An eligible employer may use any reasonable method to determine the number of hours that a salaried employee does not provide services, but for which the employee receives a wage equal to the employee's normal wage or at a reduced wage. People who have more than 100 full-time employees can only use the qualified salaries of employees who do not provide services due to the suspension or decline of business activity. Payments made in connection with the termination of a former employee's employment relationship are not qualifying wages because they are payments from the previous employment relationship and, therefore, cannot be attributed to the time during which the employee retention credit can be requested. The purpose of the ERC was to encourage employers to keep employees on the payroll even if they weren't working during the period covered due to the effects of the coronavirus outbreak.
Originally, employers had to choose between applying for a Check Protection Program (PPP) loan or applying for the ERC. If the eligible employer is an entity other than a corporation, then a related person is any person who maintains a relationship described above with a person who owns, directly or indirectly, more than 50 percent of the entity's equity and profits. The fact that an employee has terminated their employment relationship is based on all facts and circumstances, even if the employer has considered the employment relationship to be terminated for purposes other than continuing to pay the salary. Therefore, employers O and P are considered a single eligible employer with more than 100 full-time employees for the purposes of the employee retention credit.
Although it can be confusing, the fact that the hours of part-time employees can be added up to form an equivalent of full-time employees will likely allow companies to have fewer employees for the ERC than they reported for the PPP.