We’ve previously discussed the Employee Retention Tax Credit (ERTC) and how it impacts essential businesses with partial shut downs in previous issues of our GoodSense newsletter, linked below as related reads, but there have been some notable changes to the ERTC that could impact both you as a bank, and your customers.
Related Read: Employee Retention Tax Credits: Are Banks Eligible?
Originally under the CARES Act, a business that took a Paycheck Protection Program (PPP) loan was not eligible for ERTC. New legislation changed this for 2020, retroactive back to wages paid after March 12, 2020. You will want to make sure your loan customers know about this, and are maximizing both PPP loan forgiveness and ERTC, as the same wages cannot be used for both.
Related Read: CARES Act: Employee Retention Tax Credit is Available
The ERTC (originally set to expire in December 2020) has now been extended through June 30, 2021 under the second stimulus program guidance, with some important tweaks that could impact you.
- For 2021, an employer that meets ERTC eligibility may claim a credit for 70% of the wages paid to an employee, on up to $10,000 of wages quarterly per employee. This is a maximum $7,000 credit on up to $10,000 of wages, quarterly, per employee.
- The credit is claimed against payroll taxes on your quarterly payroll tax filing. This is up from 50% of the wages paid to an employee, on up to $10,000 of wages per employee in 2020.
Note that the employer’s tax deductions are reduced by the amount of the credit under section 280C(a). If the employer has $100,000 of eligible wages and receives a $50,000 ERTC, the net deductible expenses are $50,000. Additionally, any wages used for this credit cannot also be used when figuring the R&D tax credit. Eligible wages also exclude any wages used to claim FFCRA credits.
“Given the current interest rate environment, we believe there could be a chance that banks may qualify based on the reduction of gross receipts,” says Sandy Sporleder, partner and community bank team leader.
In order to qualify for the ERTC, your operation needs to meet one of the following two criteria:
- Operations were partially or fully suspended due to a government order.
- Eligible wages are for the period in which the partial or full suspension occurred. As we’ve discussed with many of you, and in our previous issues of GoodSense newsletter, simply closing your branch lobby may not constitute a shut down. It needs to be as a result of a government order, and could differ from bank to bank.
- Revenues decreased by at least 20% (down from 50% in 2020) when measuring:
- A) Q1 or Q2 of 2021 compared to either Q1 or Q2 of 2019
- B) If a business did not exist at the beginning of the same quarter in 2019, the same quarter in 2020 is substituted.
- C) A business may elect to satisfy the gross receipts test by looking at the immediately preceding quarter and comparing that quarter to the corresponding quarter in 2019. EXAMPLE: An employer who could not satisfy the gross receipt test in Q1 of 2021 could elect to compare gross receipts in Q4 of 2020 to Q4 of 2019. If there’s a drop of more than 20%, Q1 of 2021 will be an eligible quarter.
If an employer has less than 500 FTEs (measured as 30 hours/week = 1 FTE), wages paid for employees both working and not working qualify. This is a change from 100 FTEs in 2020. If more than 500 FTEs, only wages paid to furloughed employees qualify. The FTEs are counted as the average monthly FTEs in 2019.
Once you’ve determined if you qualify under either option 1 or 2 above, and whether or not you are over or under 500 average monthly FTEs, you can calculate the eligible credit.
Under 500 FTEs
For every period in which the employer has an eligible quarter, the credit is equal to 70% of the wages paid. The maximum wages for any one employee is $10,000 in wages, per quarter. A maximum $14,000 credit. This is a change from 50% of $10,000 wages for the entire year, or $5,000 in 2020.
Over 500 FTEs
Only the wages paid to employees to not work during the eligible quarter can be used to claim the credit. Wages for those employees working are not eligible.
You can increase the wages paid to an employee by the employee’s allocable share of healthcare costs.
For questions regarding the new ERTC guidance or applying the eligibility rules to your business, contact a KCoe advisor.