February 23, 2021

New tax credit rule can gain you up to $19K per restaurant employee

Stan Harris, LRA president and CEO, weighs in on the tax law changes that could provide restaurants with big credits.
Tax Credit

The Taxpayer Certainty and Disaster Tax Relief Act includes several changes and improvements to the ERTC that can help you keep employees on staff after you’ve run through PPP loan money.

One of the good things about December’s COVID-19 relief package—beside the fact that it provided another round of Payroll Protection Program largely focused on small businesses—is that it fixed or improved some aspects of earlier bills.

One of these issues is the Employee Retention Tax Credit.

“The ERTC in its current version is far more appealing,” says Stan Harris, president and CEO, Louisiana Restaurant Association. “The first structure of ERTC was used by those operators who chose not to seek PPP, or who had adequate capital or lines of credit.” The new version, he says, lets operators take advantage of both the ERTC and a PPP loan, if they get the timing right.

December’s Taxpayer Certainty and Disaster Tax Relief Act includes several changes and improvements to the ERTC that can help you keep employees on staff after you’ve run through PPP loan money.

Now, if you’re eligible, you can access ERTC for up to $5,000 per eligible employee for a calendar quarter in 2020, and up to $7,000 per eligible employee per quarter in 2021 from January 1, 2021 through June 30, 2021.

Here are the highlights:

Eligible restaurants. Restaurants with 100 or fewer full-time employees can access the ERTC for employees working in 2020. Companies with 500 or fewer full-time equivalent employees (FTEs) can access the ERTC for those employees working in 2021. The tax credits are only available for payroll wages and/or group benefits you didn’t pay directly with PPP loan funds. Your employer status (small or large) is based on the aggregate number of FTEs you employed in 2019.

Eligible employees. FTEs are those who work at least 30 hours per week or 130 hours a month.

If you first opened in 2019, calculate the number by taking the sum of the number of FTEs in each full calendar month your restaurant was open in 2019 and divide by that number of months.

If you first opened in 2020, use the same approach to calculate your FTEs.

Eligible circumstances. Since lawmakers intended this as pandemic relief, you can only get the ERTC if 1) your operation was partially or fully suspended by governmental authority due to COVID-19 (including capacity restrictions due to social distancing, closure of indoor dining, or closure of all on-site dining); or 2) your business experienced a significant decline in sales when comparing a calendar quarter (or prior quarter) to its matching quarter in 2019.

Eligible wages. Qualified wages are defined by IRS Code in section 3121(a) and section 3231(e). You can include group health plan expenses, such as monthly insurance premiums, which will come as a relief to many restaurants who continue to support their staff. “Even during economic hardship, restaurants have been maintaining health benefits to ensure their employees have access to their medical providers and prescription drugs throughout the pandemic,” said Clinton Wolf, senior vice president of Health & Insurance Services at the National Restaurant Association.

And remember, you can’t apply for the credit for a quarter in which you used PPP loan funds to directly pay wages. But if you exhausted PPP loan money by say, September last year, you could apply the ERTC to eligible employees for the fourth quarter of 2020.

ERTC advances. To apply for advance payment of employee retention credits, fill out IRS Form 7200.

The article “Big tax credits to restaurants could support employee retention” has more examples.  And download and share our detailed ERTC explainer.