2020 was difficult for many individuals and businesses. A vast amount of business owners were forced to face tough decisions, often choosing between what was best for their own families or keeping their employees working. While many companies were closing their doors, the Federal Government saw these problems arising within the economy, therefore enacted the Employee Retention Credit under the CARES Act. Its priority was to encourage businesses to continue paying employees in order to bring earnings home to their household. Subsequent to the relief bill, a few changes have been made. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 affected the Employee Retention Tax Credit. Below are the notable changes and qualifications.
About the ERC
The Employee Retention Credit is an entirely refundable employer tax credit. Initially, employers could earn credit on employee wages paid between March 12, 2020 and December 31, 2020. The credit allowed up to $10,000 to be deducted from employee wages per employee, leaving the employee to receive a 50% credit of the qualified wages (maxed at $5,000 an employee).
Does my company qualify for the ERC?
It’s essential to know the conditions since not all businesses are eligible for the ERC.
For starters, a business must have been operating during the year 2020. Next, the company must have had suspension due to a governing authority’s restrictions due to COVID-19. Thirdly, the business must have endured a significant decrease in gross revenue, meaning the gross receipts are less than 50% in the first calendar quarter than it was for the same period in 2019. Lastly, wages must have been paid to the employees by the employer. The ERC also considers health plan expenses as wages.
It’s essential to note that while specific tax-exempt organizations qualify for the ERC, government employers do not, although certain tribal entities may be eligible.
Are large businesses eligible?
During the ERC’s first version of last year, companies that averaged more than 100 employees in 2019 were deemed large businesses. Consequently, their criteria for eligibility for the ERC were more complex. Specifically, wages paid to an employee while the worker is not actively providing a service would qualify. This can be due to economic hardship resulting from the suspension or a significant gross revenue reduction, differing from smaller companies that can receive the tax credit for any employees’ wages.
What are the ERC changes for 2021?
There are now several significant updates to the ERC. Below are the critical changes:
- The ERC cutoff was initially December 31, 2020, but its extension is now through June 30, 2021.
- In 2021, if businesses experience a 20% decrease in gross revenue during the first two quarters of this year compared to the first two of the previous, they might be eligible.
- The definition of a large company has changed for 2021. Now, large businesses are considered to have over 500 employees. For a business with less than 500 workers, the basis for eligibility is the same as small employers, 100 or fewer, in 2020.
- Companies that began operation in response to a demand due to COVID-19 might qualify for the ERC.
- In 2021, the percent wages paid on credit increased from 50% during 2020 to 70%. Although, for large businesses, employee wages only qualify for the ERC if paid during leave or on the payroll but not actively working.
- With the maximum tax credit being $5,000 for 2020, the ERC update increased the maximum to $7,000 for both of the first two qualifying quarters in 2021.
- A worker’s wages may be eligible for the ERC if an employee works at or below their standard qualifications.
- However, companies may qualify for the ERC after taking a PPP loan; they can not use the same wages for both the ERC and PPP loan forgiveness qualification.
The purpose behind the ERC
The government continues working to assist struggling employers during these unprecedented times. It is encouraged by the ERC for businesses to continue running payroll. It provides benefits to both employers and employees when doing so. It’s vital to remember that not all companies qualify for the ERC, as mentioned before.