The federal Employee Retention Credit (ERC) was part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act of March 2020. The ERC is a federal tax incentive provided to employers who continued to pay employees from March 13, 2020, to December 31, 2020.
In March 2021, the American Rescue Plan (ARP) Act expanded and extended the ERC through December 31, 2021. The expansion includes a larger amount per employee, a more significant share for severely distressed businesses. It includes start-ups and new businesses formed in 2020.
Key items to note include:
- Businesses that received a PPP loan can now also claim the ERC if they meet the eligibility requirements,
- The ERC was extended through December 31, 2021, and
- The ERC between 2020 and 2021 can be up to $33,000 per employee.
The Employee Retention Credit 2020
For 2020, the employee retention credit provides up to $5,000 (50% of up to $10,000 of wages) per employee who remained on the payroll through the end of the year. Employers qualify for the credit if they meet either of these criteria:
- Ordered to partially or fully suspend business by federal, state, or local government due to COVID-19, or
- Gross receipts had a significant decline during any quarter (declined by at least 50% (safe harbor) for the comparative quarter in 2019 versus 2020).
The Employee Retention Credit 2021
For 2021, the employee retention credit provides up to $7,000 (70% of up to $10,000 of wages) per employee per calendar quarter, for a maximum of $28,000 for the year.
To be eligible for the expanded ERC, a business must experience at least one of these in 2021:
- Ordered to partially or fully suspend business by federal, state, or local government due to COVID-19,
- Gross receipts fell at least 20% for the comparative quarter in 2019 versus 2021, or
- Recovery start up business that began operations after February 15, 2020 with average annual gross receipts under $1,000,000 does not have to meet gross receipt test reduction.
Small employers with 500 or fewer full-time employees can reduce their employment tax deposits immediately. The definition of a small business in 2020 was 100 or fewer employees, which expanded to 500 or fewer for 2021. Larger businesses can only take the ERC for full-time employees paid but not actively working.
In the updated ERC, employers who received Paycheck Protection Program (PPP) loans could claim the credit for qualified wages. This is true, even if they didn’t qualify as payroll expenses when requesting PPP loan forgiveness. This change is retroactive back to the starting date of ERC. There are ways to maximize your ERC Credit versus your PPP loan forgiveness.
Includes wages paid from 3/13/2020 through 12/31/2020 for the 2020 credit and 1/1/2021 through 12/31/2021 for the 2021 credit:
Salary and wages
Tips (if included on the W-2)
Health insurance costs
Do not subtract pre-tax contributions to retirement plans
Termination pay/severance pay is not qualified
Still Have Questions about the Employee Retention Credit?
If you still have questions about the federal Employee Retention Credit, ask your advisor or tax consultant. Don’t have one? I founded my business to help business owners with their accounting and tax questions to maximize their financial health.
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