Last year was a hard one on many fronts. It was hard for individuals, and it was hard for businesses. Many business owners had to face tough choices, often choosing between what was best for their own families, or trying to keep their employees working. While many businesses were shutting their doors, the Feds saw the problems arising within the economy, and therefore enacted the Employee Retention Credit, under the CARES Act. The purpose of the credit was to encourage businesses to continue to pay employees, so that they could bring earnings home to their families.
Since then, there have been changes to the relief bill—the Taxpayer Certainty and Disaster Tax Relief Act of 2020—which affect the Employee Retention Tax Credit. Here are the updates so you will know if you qualify, as well as any other noteworthy changes.
What exactly is the ERC?
The Employee Retention Credit is a fully refundable employer tax credit. In the original version, employers could earn the credit on employee wages paid during the timeframe of March 12, 2020 through December 31, 2020. The credit could be taken on employee wages up to $10,000 per employee, with the employer receiving a credit for 50% of the qualified wages, up to $5,000 per employee.
Is my business eligible for the ERC?
Not all businesses are eligible for the ERC, so it’s important to be aware of the conditions.
First, a business must have been in operation during the 2020 calendar year. Second, the business must have been suspended due to restrictions imposed by a governing authority due to COVID-19. Third, the business must have experienced a “significant decline in gross receipts.” This means the first calendar quarter where gross receipts are less than 50% for the same period in 2019. Finally, the employer must have paid wages to employees. For the purpose of the ERC, qualified health plan expenses are also considered wages.
It’s important to mention that while certain tax-exempt organizations are eligible for the ERC, governmental employers are not. Still, it is possible that certain tribal entities may be eligible.
What about large employers?
During the first version of the ERC in 2020, employers who employed an average of more than 100 employees in 2019 were considered large businesses. Thus, their criteria for eligibility for the ERC was slightly more complicated. Specifically, qualified wages are those paid to an employee during a period when the employee is not actively providing services. This can be due to economic hardship as a result of suspension or a great reduction of gross receipts. This differs from smaller employers who can receive the tax credit for wages paid to any employee.
What are the major changes to the ERC?
Now, for 2021, there are a handful of major updates to the ERC. Here are the important changes:
- The cutoff for the ERC was originally December 31, 2020, but is now extended through June 30, 2021.
- Employers for 2021 may be eligible for the ERC if they experienced a 20% decrease in gross receipts during Q1 and Q2 of 2021 versus their gross receipts in 2019.
- The definition of what it means to be a large employer has changed for 2021. Now, employers with more than 500 employees are considered large businesses. For employers with fewer than 500 employees, the criteria for eligibility mirrors that of small employers (100 or fewer) in 2020.
- Businesses who began operation as a reaction to need that emerged due to COVID-19 may be eligible for the ERC.
- The percent of the credit on wages paid increased from 50% in 2020 to 70% in 2021. However, for large businesses, employee wages are only eligible for the ERC if paid during furlough or while on the payroll but not actively working.
- While the maximum tax credit for 2020 was $5,000, the update increase the max to $7,000 for each of the first two qualifying quarters in 2021.
- If an employee works at or below his/her normal qualifications, that worker’s wages may be eligible for the ERC.
- Although it is possible for businesses to be eligible for the ERC after taking a loan through the PPP, they may not use the same wages for both qualification for the ERC and PPP loan forgiveness.
Journey through the ERC
As you can see, the government is trying hard to continue to assist employers in their time of need. The ERC encourages employers to continue to run payroll. In doing so, it offers benefits to employees and business owners alike. However, not every business is eligible for the ERC. Also, there are a few noteworthy changes that took place to the ERC since 2020. For example, extending the ERC, increasing credit percentages, and changing definitions, to name a few updates within the new bill.
If your business qualifies for the ERC, remember to turn to Journey to help you accurately process your payrolls to maximize your tax credit.