8 Employee Retention Credit (ERC) Changes to Know

Key Takeaways:

 

• • The Employee Retention Credit (ERC) started in March 2020 with the CARES Act, alongside other forms of relief like the Paycheck Protection Program (PPP)

• • Key requirements for the ERC include:

     

    • • Employers had to have closed because of a government order or lost gross receipts
    • • The limits for the credit are $5,000 per employee per year in 2020 and $7,000 per employee per quarter in 2021
    • • Small employers can take the full allowed credit, while large employers can only take it for wages paid to employees not providing services

• • Eight changes to the ERC to know about:

     

    1. 1. ERC extension
    1. 1. Increased qualified wages
    1. 1. Changes to gross receipts eligibility requirements
    1. 1. Increased credit limits
    1. 1. Definition of large employer
    1. 1. PPP loan holders can apply
    1. 1. Inclusion of certain government employers
    1. 1. Fourth quarter of 2021 limited to recovery startup businesses

 

• • Avoid common pitfalls of the ERC, like failing to calculate wages correctly or not applying by the deadline, which is three years from when you filed your initial payroll tax return

The pandemic impacts have become less severe for some, but many businesses are still dealing with the aftereffects. Some had to close, cease portions of their operations, shift to a remote work environment, or lay off key staff members. The government provided several forms of assistance throughout the pandemic, and some programs are still ongoing as we move forward.

It’s important for businesses to stay up to date on any changes or updates to tax laws and credits that may impact their operations. One such credit that has undergone several revisions over the past few years is the Employee Retention Credit (ERC), which was created at the beginning of the pandemic in 2020.

There have been some significant updates made to the ERC with subsequent legislation. These updates aim to provide additional relief for businesses affected by the COVID-19 pandemic, including those that were previously ineligible for this credit. This blog post explores Employee Retention Credit changes in detail.

When Did the ERC Start?

The ERC was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. It was introduced alongside other government relief programs, like the Paycheck Protection Program (PPP). This loan program, similar to the ERC, was meant to help businesses keep their employees on the payroll during the hardships of the pandemic.

The ERC was initially for the period of March 12, 2020, through Dec. 31, 2020. Employers could claim the credit for any qualifying periods during that time. Further legislation, however, extended the credit into 2021 and expanded the terms. These laws included the Consolidated Appropriations Act of 2021, the American Rescue Plan Act of 2021, and the Infrastructure Investment and Jobs Act (IIJA).

The ERC was set to go through the end of 2021, but it was ended on Sept. 30, 2021, for most businesses. Recovery startup businesses—those that started operations after Feb. 15, 2020, and have less than $1 million in annual gross receipts—can claim the credit for the last quarter of 2021. All other businesses can only be eligible for the first three quarters of 2021.

This significant tax credit has now ended. Businesses can, however, still claim it if they qualify, using Form 941-X, which amends their initial payroll tax return (Form 941). You have three years from the date you filed your original return, or two years from the date you paid the tax, whichever is later, to claim the ERC retroactively.

Key Requirements for the ERC

There are several elements to know about how the ERC works and how to qualify. Let’s walk through the key terms and requirements for the ERC:

Eligibility Requirements for Employers

There are two ways employers can qualify for the ERC. The first is to determine if your business closed because of government orders in 2020 or 2021. You could have closed partially or fully to qualify, as long as it was in a qualifying quarter. The second way to be eligible for the ERC is if you lost at least 50% of gross receipts in 2020 or at least 20% in 2021, when compared to the same quarter of 2019. 

ERC Limits

The ERC equals 50% of up to $10,000 in wages paid to employees in 2020, and 70% of up to $10,000 in wages paid to employees in 2021. You can claim up to $5,000 per employee for the whole year of 2020, and up to $7,000 per employee per quarter in 2021 (so, up to $21,000 per employee for the whole of 2021).

Employer Size

Most employers qualify for the ERC, at least for certain quarters. Large employers are those with 100 or fewer full-time employees for 2020 eligibility, and for 2021, they are those with 500 or fewer full-time employees. Large employers can only use wages paid to employees for not providing services when calculating their ERC. Small employers can use any wages paid to part-time or full-time employees during qualifying quarters.

It is possible you’re eligible for up to $26,000 per employee with the ERC, so make sure you find out if you qualify right away. This credit could make a significant impact on your business, helping you cover payroll tax costs. Talk to an ERC expert if you have questions about ERC eligibility. 

Eight Employee Retention Credit Changes You Need to Know 

There have been several iterations of relief legislation since the pandemic began in early 2020. Most of these have included some kind of change to the ERC. Here is a comprehensive list of the ERC changes to know from 2020 to 2021:

1. ERC Extension Changes

The initial ERC only went through the end of 2020 and then was extended until June 30, 2021. The American Rescue Plan then extended the credit to Dec. 31, 2021. The subsequent IIJA backtracked that, however, and ended the program on Sept. 30, 2021, for the majority of U.S. businesses.

2. Increased Qualified Wages

The percentage of qualified wages that can be used to calculate the ERC was expanded for 2021 quarters. It went from 50% of up to $10,000 wages in 2020 to 70% of up to $10,000 in 2021. This percentage also applies to each quarter of 2021, not the whole year, like in 2020. 

3. Changes to Gross Receipts Eligibility Requirements

One of the ERC eligibility requirements is to have a decline in gross receipts from either 2020 or 2021 when compared to 2019. This amount was at least 50% less for 2020, and that percentage changed to at least a 20% decline in 2021. This means that more businesses likely qualify in 2021 since that requirement is more generous.

4. Increased Credit Limits

Employers can get a bigger credit in 2021 because of the increase in qualified wages. You can claim up to $5,000 per year in 2020 and up to $7,000 per quarter in 2021, or $21,000 per employee for all of 2021. This is a significant increase from one year to the next.

5. Definition of Large Employer

It’s also important to pay attention to how ERC legislation defines “large” versus “small” employers. Large employers were considered those with more than 100 full-time employees in 2020. That definition changed in 2021 to businesses with more than 500 full-time employees. Large employers can only claim wages that were paid to employees not providing services. More employers qualified in 2021 to take the full credit since that definition changed.

6. PPP Loan Holders Can Apply for the ERC

The ERC and the PPP were both created by the CARES Act to help employers maintain their staff levels and get much-needed support through the COVID-19 pandemic closures and losses. Businesses that received a PPP loan initially couldn’t also claim the ERC. Successive legislation, however, changed those terms. You can now apply for the ERC even if you received a PPP loan. You just can’t use the same wages that were paid for with funds from your PPP loan to calculate your credit.

7. Inclusion of Certain Government Employers

The CARES Act stated that “any employer operating a trade, business, or a tax-exempt organization, but not governments, their agencies, and instrumentalities” were eligible for the ERC. The ERC was expanded in 2021 to include some governmental employers, including those described in section 501(c)(1) and that are exempt from tax, and colleges or universities that principally provide medical or hospital care services.

8. Fourth Quarter of 2021 Limited to Recovery Startup Businesses 

The IIJA limited the last quarter of 2021 to recovery startup businesses, meaning these businesses could qualify for all four quarters of 2021. Other businesses only qualify for the first three quarters of 2021.

Most changes made by legislation after the CARES Act expanded and extended the ERC so more businesses were eligible and could claim the credit for more quarters. They still had to have closed because of a government order or lost gross receipts. 

Tips for Applying for the IRS Employee Retention Credit

There are some mistakes and hiccups to avoid when you start the process of applying for the ERC. Here’s a list of a few some tips and pitfalls to avoid to help guide you:

 

• • Use Form 941-X. You can no longer include your ERC on Form 941 after you’ve already submitted your return for the applicable quarter. However, you can use Form 941-X to amend your return and include the ERC. Make sure you download the latest version of the form from the IRS website.

• • Check all of your calculations. You’ll need your final numbers to report on Form 941-X, along with detailed explanations of how you arrived at those numbers. 

• • Understand which wages you can include. Qualified wages include wages, tips, and compensation you paid to part-time or full-time employees for the applicable quarter and may also include health plan expenses. Even though the number of full-time employees you have impacts your eligibility as a small versus large employer, you can still include all employees’ wages in your calculations.

• • Don’t include contractor payments. You can’t, unfortunately, include money you paid to contractors or freelancers for the ERC. This means anything you report on 1099s for non-regular workers.

• • Keep detailed records. You need up-to-date, accurate books anytime you’re planning to take a credit to provide the necessary information for taxes. This means being as organized as possible with payroll and tax information all year.

• • You may need to amend your payroll tax return after applying. Your ERC will change what you have to pay for employer taxes, since the credit will change your wage expenses. You don’t have to pay taxes on the ERC, however, since the IRS considers it a refund, not income.

• • Don’t miss the deadline. You have three years from when you first filed the original tax return, or two years from when you paid the tax, whichever is later, to claim the ERC.

The best thing you can do to get the ERC is to claim it as soon as you realize you’re eligible. These steps and tips have hopefully helped you understand how to qualify and what to do when you’re ready to apply using Form 941-X. Don’t miss your opportunity to get this substantial tax credit to help your business stay afloat.

Contact ERC Today With Questions About ERC Changes

It’s important to pay attention to how COVID-19 relief legislation is changing and what those updates mean for your business. We’re here to help you through it all at ERC Today. Our tax credit experts understand how all of these changes impact businesses like yours, and we can advise you on the best approach moving forward. Contact ERC Today for more information about your Employee Retention Credit options.