Everything You Need to Know About the Employee Retention Tax Credit

Retention Tax Credit
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The 2021 tax season is here and there are so many changes. The Covid-19 pandemic continued to wreak havoc on the economy in early 2021. At one point in 2021, nearly 10 million Americans had lost their jobs.

Businesses also suffered as it was difficult to maintain a staff and customers were afraid to shop. Many closed their doors as the demand for goods and services diminished.

As a result, the federal government had to step in and provide assistance. The Employee Retention Tax Credit was one mechanism developed to salvage the economy.

Read on to learn all about the Employee Retention Credit (ERC). Explore tax assistance programs offered by the federal government to provide Covid-19 relief.

What Is the Employee Retention Tax Credit?

Before we discuss eligibility and benefits, it is important to define what the ERC is. The ERC is a refundable tax credit offered by the U.S. Department of Treasury. It was initially authorized when Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020.

However, this law only covered employees’ qualified wages through the end of 2020. Congress needed to extend the ERC’s benefits multiple times.

The Consolidated Appropriations Act and the American Rescue Plan Act both extended the tax credit. The Infrastructure Investment and Jobs Act is the latest legislation to keep the ERC running.

Helping employers keep their workers on the payroll certainly helped the labor market. The national unemployment rate is now at 4% and most jobs lost during the pandemic have returned.

What Are the Benefits of the ERC?

The ERC allows employers to reduce their tax obligation to the Internal Revenue Service (IRS). Originally, the credit equaled 50% of an employee’s qualified wages. The cap on employee wages was $10,000 for the period running from March to December 2020.

The Consolidation Appropriations Act of 2021 increased the refundable tax credit to 70% of an employee’s qualified wages. The wage cap was also increased by shortening the duration for eligible wages. Instead of the 9-month period from the CARES Act, the $10,000 cap was imposed on a quarterly basis.

This means that the tax credit is now 70% of up to $40,000 in qualified wages for the year. Your tax credit as the employer is up to $28,000 based on these figures. 

The American Rescue Plan Act took the tax benefits a step further. The government recognized that many startup businesses failed during the Covid-19 pandemic. For failed businesses, Congress increased the tax credit to $50,000 per quarter.

Who Is Eligible for the ERC?

There are two primary eligibility criteria for the ERC. The first one is to demonstrate that your business was impacted by the Covid-19 pandemic. Businesses that partially or fully suspended operations due to Covid-19 may qualify for the tax relief.

Many businesses could not keep their doors open due to restrictions imposed by state and local governments. This was especially true for businesses that interacted with customers in close quarters. Businesses such as gyms and hair salons were not allowed to let customers in.

Along these lines, another eligibility requirement for the ERC is demonstrating a loss of revenue. Businesses need to show that their gross sales decreased by 50% or more. The comparative data point must show the same quarter in 2019.

When sales start to improve, you may no longer qualify for the ERC. Once gross sales reach 80% of the same quarter in 2019, you can no longer attain the ERC’s benefits.

How Long Does It Take To Receive the ERC Benefits?

Once you are approved for this tax credit, the benefits start flowing in immediately. This is because each pay period, payroll taxes are withheld from an employee’s wages.

With ERC approval, you can reduce the amount of payroll taxes withheld. This means your business is depositing less money with the Department of Treasury.

What Are Considered Qualified Wages?

There is an important stipulation for qualified wages. It depends on the size of your business. The threshold for the qualified wages rule is set at 100 employees.

The rules are less strict for companies with fewer than 100 employees. Here, the credit is calculated based on wages paid to all employees.

It does not matter whether the employees worked or stayed home. This is an incredible benefit to employers. It means that your employee can still work 40 hours per week and your business remains eligible for the tax credit.

This rule does not apply to companies with more than 100 employees. Instead, you can only claim the tax credit for employees who did not work.

The period under consideration is the entire quarter. If an employee worked eight hours on the first day of the quarter, you cannot claim the credit against his or her wages.

One other important detail for the ERC is what is considered wages. The ERC applies to a greater share of wages than the employee’s direct labor rate. The employer’s portion of health care costs is also factored in the tax credit calculation.

What Is the Deadline to Apply for ERC Benefits?

Thanks to the American Rescue Plan Act, ERC benefits now cover qualified wages through the calendar year 2021. Now that we are in 2022, there is still time to apply.

You can submit a 941-X Amended Quarterly Payroll tax form to the IRS. The IRS is accepting these forms for three years after the initial submission. Essentially, amended tax forms can be submitted through 2024 now.

Summarizing the Employee Retention Tax Credit Program

After the Covid-19 pandemic decimated businesses, Congress threw a lifeline to the nation. This came in the form of a tax credit that allowed employers to keep their workers on the books.

The latest iteration of the ERC is a generous program. It offers a refundable tax credit on 70% of employees’ qualified wages. This figure even includes the employer’s portion of health care costs.

For companies with fewer than 100 workers, it does not matter if your employees worked full-time or not at all. If you want to determine your eligibility for the Employee Retention Tax Credit, contact us today for a free evaluation.

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