The Employee Retention Credit (ERC) was introduced as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed in March 2020. This relief package aimed to support Americans and businesses impacted by the pandemic. Record numbers of people were laid off, the unemployment rate soared, and many companies faced permanent closure, issues that persist today as the pandemic is still a reality.
The ERC was created to help employers keep their employees on the payroll instead of furloughing them or laying them off. The ERC is a fully refundable tax credit that applies to qualifying wages paid to full-time employees from March 13, 2020, to December 31, 2020. The credit has since been extended through 2021 as well, with slightly different terms.
The Consolidated Appropriation Act of 2021 (CAA), approved in December 2020, made some key changes to the ERC. This is your guide to those changes and tips for applying for the ERC.
CAA Changes to the ERC
The CAA made some changes to the ERC that are just for 2021 and a few that are retroactive, meaning they also apply to the original eligibility period in 2020. Here are the retroactive alterations:
Payment Protection Program (PPP) Loans
Businesses that received a Payment Protection Program (PPP) loan can now qualify for the ERC for wages not paid with PPP loan funds.
Gross Receipts Definition
There were lots of questions about what “gross receipts” encompassed in the original legislation. The CAA clarifies how tax-exempt organizations figure out their gross receipts, providing some assistance for determining eligibility.
Qualified wages now include group health care expenses, even if no other wages were paid to the employee.
There Are Also Changes That Just Apply to 2021
The credit was 50% of qualified wages per employee with a limit of $10,000 per year in 2020. This rate was increased to 70% of wages per employee and a limit of $10,000 per quarter for 2021.
An eligible period for 2021 is a quarter when gross receipts were 20% less than the quarter in 2019, and for 2020 that number was 50%. Note that the CAA states that businesses that did not exist in 2019 can compare gross receipts to 2020 quarters.
The ERC is now available to public colleges and universities, in addition to medical or hospital care organizations and organizations chartered by Congress.
Large Employer Definition
The 2020 ERC defined a “large” employer as one with more than 100 employees, but for 2021, large employers have more than 500 employees.
Qualified Wages Limit
The CAA got rid of the qualified wages limit that is no more than the worker would have normally made in the 30 days before the qualifying period.
Businesses with fewer than 500 full-time employees may be able to receive advance ERC payments in the quarter employees received the wages.
These changes can be confusing for businesses that want to take advantage of the ERC, especially when they vary from year to year. Always talk to an ERC expert if you have questions about how the CAA impacts this important business tax credit.
6 Tips for Applying for the ERC
The changes made to the ERC from the CAA may impact whether you qualify and what the credit will be. Here are a few tips when you’re figuring out the ERC, what wages qualify, how to apply, and your general responsibilities:
1. Know If You Qualify
Most employers qualify for the ERC. You must be a trade or business that was suspended, either fully or partially, because of a government order, or one that had a significant decline in gross receipts per the guidelines mentioned above.
2. Understand What Wages Qualify
Compensation subject to FICA taxes and qualified health expenses are qualifying wages used to calculate your ERC. Tips would be included if they were subject to FICA taxes.
3. Learn How It’s Issued
The ERC will usually be issued as a cash payment from the IRS and is not an income tax credit. Qualifying businesses can claim the credit right away.
4. Claim the ERC Even If You Received a PPP Loan
You can still claim the ERC even if you received a PPP loan, thanks to the CAA. Just make sure you only claim the credit for qualified wages that weren’t treated as payroll costs for your PPP loan forgiveness.
5. Assess Other Credit Eligibility
Make sure you’re not trying to take more than one overlapping credit. Employers cannot take both the ERC and another credit on the same wages for paid family medical leave. Employees included in the work opportunity tax credit also cannot be included for the ERC.
6. Apply by the Deadline
File Form 941-X, Adjusted Employer’s Quarterly Payroll Tax Return, with the IRS within three years following your initial return filing.
The ERC is a way to help businesses keep their employees on the payroll and avoid furloughs or layoffs. Make sure you fully understand the guidelines for both 2020 and 2021, which can become challenging with all of these changes.
Contact the ERC Experts for Help
It’s not always easy to sift through changing legislation related to the ERC and other tax credits your business could be eligible for. The Consolidated Appropriation Act of 2021 made some changes you can’t ignore, but it’s time-consuming and confusing to know how to calculate everything correctly and fill out all the right forms.
ERC Today is here to help you understand this tax credit and how to apply to get the relief you need as a business owner. Learn what government program best fits your business’s needs by contacting ERC Today. You can also fill out our ERC application online to get started.