The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) of 2020, which aimed to provide pandemic relief to Americans, included a tax credit for employers known as the employee retention credit (ERC). The ERC encouraged business owners to keep their employees on the payroll during the crisis.
The Consolidated Appropriations Act (CAA) and the American Rescue Plan subsequently passed into law to expand and extend the ERC, which now continues through the end of 2021. The legislation also expanded the definition of an eligible employer and increased the credit value for the new year.
The ERC is a refundable tax credit, and initially, between March 12, 2020, and December 31, 2020, employers could claim a credit against their Social Security taxes for each quarter equal to 50% of qualified wages for each employee, up to $10,000 wages per employee for all quarters. That’s a potential total of $5,000 per employee.
The CAA then raised the credit to 70% of qualified wages per employee, and up to $10,000 per employee per quarter, meaning the credit gives employers a potential $28,000 per employee.
This is a significant jump that could significantly impact your bottom line. Small employers, those with 500 or fewer full-time employees in 2019, might even be able to request advance payment of the credit.
Initiatives like the CARES Act get credit for reducing the poverty rate to 9.1% in 2020. That dropped from 11.8% in 2019, which the U.S. Census Bureau recently announced was the actual rate when factoring in all the pandemic relief aid.
What else has changed about the ERC, exactly, and what do the extensions mean? This post will walk through the extended COVID 19 tax credit, other expanded terms to know about, and three quick qualification requirements for employers.
The Latest COVID 19 Tax Credit Extension
Extension Details
The ERC is now extended for wages paid through December 31, 2021, from the original date of December 31, 2020. The CAA extended the effective date through June 30, 2021, which the American Rescue Plan then extended through the end of 2021.
Employer Definition
The expanded ERC, aside from increasing the credit, now also includes employers with 500 employees or fewer, instead of the original guidelines that said employers with more than 100 employees could only claim the credit for wages paid to employees not providing services. The updated ERC also changes additional eligibility requirements, as outlined in the next section.
PPP Loans
Employers can now take advantage of the ERC even if they received a Paycheck Protection Program (PPP) loan, which was not allowed under the original ERC guidelines. This provision is retroactive.
The ERC is still a fully refundable tax credit for employers for 2021. Keep in mind that it’s treated as a cash payment from the IRS to help with payroll tax expenses and doesn’t work like a typical income tax credit.
Businesses must file Form 941 to take the credit, or for an amended filing, they need to file IRS Form 941-X, Amended Quarterly Payroll Tax Return, within three years after the initial return filing to take this credit.
3 Qualification Requirements for the ERC COVID Relief
1. Eligibility Period
Companies must pay employees within the eligibility period, which runs from March 12, 2020, to December 31, 2021, and meet these requirements:
- The business was suspended or shut down because of a governmental order
- Gross receipts were 50% less than the same quarter in 2019, for 2020
- Gross receipts were 20% less than the same quarter in 2019, for 2021
2. Eligible Wages
The ERC applies to the employer’s share of Social Security taxes on the wages paid to employees. The CAA did away with the limit on qualified wages that didn’t exceed what the employee would have earned in the 30 days before the qualifying period.
3. Health Plan Expenses
The expanded ERC now includes certain qualified health plan expenses for calculating the COVID-19 tax credit. This applies even if the employer didn’t pay any wages.
Remember that tax law can always change. These are the latest details to know for the ERC, but stay tuned in case Congress passes additional COVID-related relief.
It’s wise to talk with an expert about whether you qualify as an employer and what steps you should take to get everything filed correctly. You don’t want to make any mistakes when filing that could be costly or time-consuming to sort out later.
Here’s How ERC Today Can Help With the Covid 19 Tax Credits
Employers of all sizes experienced significant losses and setbacks during the pandemic, and many are still struggling with shortages in product or staff. Government tax relief is available, so you always need to know whether you’re claiming everything you’re eligible for.
Make sure you fully understand the extended COVID-19 tax credit so you don’t miss out on this significant opportunity to lower your tax burden.
The tax experts at ERC Today can answer questions about the ERC or your eligibility. We focus solely on the ERC tax credit so you can find the COVID-19 relief you need to keep operating and growing.
We help you understand and complete the entire process with ERC consulting and access to our secure client portal, where your sensitive information is always protected.
ERC Today makes it all quick, easy, and flexible. Submit your ERC Initial Application through our system today to get started, or contact the ERC team directly.
