What Employees Qualify for the Employee Retention Credit (ERTC)?

The Employee Retention Credit (ERTC) is a refundable payroll tax credit for employers whose business has been fully or partially suspended due to a COVID-19 related order, or who have experienced a decrease of at least 10 percent in gross income compared to the same calendar quarter of the previous year. This credit is designed to help small businesses that have lost revenue due to the pandemic, and is available to eligible employers with fewer than 500 full-time employees. The ERTC is based on qualified wages paid to employees, including certain health insurance costs. This means that even if employees find a job and are paid for it, the company can still receive the credit.

The goal of the program is to provide companies with the financial resources they need to continue paying their employees. Payments made in connection with the termination of a former employee's employment relationship are not considered qualifying wages, as they are payments from the previous employment relationship and cannot be attributed to the time during which the employee retention credit can be requested. For an employee who does not have a fixed working schedule, hours during which they do not provide services can be determined using any reasonable method. Eligible employers can request advance payment from the ERTC using IRS Form 7200.

The Annual Finance Act expanded eligibility to include companies that applied for loans under the Paycheck Protection Program (PPP), as well as debtors who were not previously eligible to receive the tax credit. After the passage of the United States Rescue Plan Act (ARP), most businesses, especially schools, universities, clinics, and 501 (c) (non-profit organizations) organizations, are eligible for credit. For the purposes of the employee retention credit, a part of an employer's business is considered an insignificant and important part of their processes if the total revenues from that component of daily activities are not less than 10% of gross income or if the length of service performed by employees in this sector of the market is not less than 10% of the total number of working hours performed by all employees of the company. Because this employee benefit requires payroll information, companies that do not pay employees with W-2 forms are not eligible.

Denise Lefler
Denise Lefler

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