Changes to Employee Retention Credit You Should Know

For some people, the consequences of the epidemic have lessened, but many businesses are still suffering from the fallout. Some were forced to shut down, curtail some of their activities, switch to a remote work setting, or fire important employees. Throughout the pandemic, the government offered a variety of aid, and some of these initiatives are still in place today. Any revisions to tax regulations and credits that may affect a company’s operations must be kept up to date. The Employee Retention Credit (ERC), which was established at the start of the epidemic in 2020, is one such credit that has undergone several changes over the previous few years.

With later legislation, the ERC has undergone some substantial revisions. Businesses affected by the COVID-19 pandemic, including those that weren’t previously qualified for this credit, are intended to benefit even more from these modifications.

What Year Did the ERC Begin?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which took effect in March 2020, established the ERC. Along with other government assistance initiatives, such as the Paycheck Protection Program (PPP), it was introduced. Similar to the ERC, this loan program was created to assist companies in keeping their staff on the payroll despite the pandemic’s challenges.

The initial duration of the ERC was from March 12, 2020, to December 31, 2020. Any qualifying period during that time was eligible for the credit, according to employers. But later legislation broadened the terms and extended the credit until 2021. These measures included the Infrastructure Investment and Jobs Act (IIJA), the American Rescue Plan Act of 2021, and the Consolidated Appropriations Act of 2021.

The ERC was supposed to last until the end of 2021 however for the majority of firms, it terminated on September 30, 2021. Businesses that started operating after February 15, 2020, and have annual gross receipts of less than $1 million are eligible to apply for the credit for the fourth quarter of 2021. Only the first three quarters of 2021 are open to all other firms.

This substantial tax credit is now over. However, companies can still claim it if they meet the requirements by using Form 941-X, which modifies their initial payroll tax return (Form 941). To make a retroactive claim for the ERC, you have three years from the time you submitted your initial return or two years from the time you paid the tax, whichever comes first.

Eight Changes to Employee Retention Credits You Should Know

Relief legislation has gone through multiple revisions since the outbreak started in early 2020. The majority of these have included changing the ERC in some way. Here is a detailed summary of the ERC changes from 2020 to 2021 that you should be aware of:

1. ERC Extension

The original ERC was only in effect through 2020, however, it was later extended through June 30 of 2021. The credit was later extended by the American Rescue Plan until December 31, 2021. However, the next IIJA reversed the course and canceled the program on September 30, 2021, for the bulk of American firms.

2. Enhanced Qualification Wages

For the 2021 quarters, the percentage of eligible salaries that can be utilized to determine the ERC was increased. In 2021, it increased from 50% of wages up to $10,000 to 70% of wages up to $10,000. In addition, rather than the entire year, as in 2020, this percentage applies to each quarter of 2021.

3. Modifications to the Conditions for Gross Receipts Eligibility

A condition for ERC eligibility is a decrease in gross receipts from either 2020 or 2021 compared to 2019. This sum was at least 50% less in 2020, and in 2021, the drop was at least 20%. As a result of the more lenient threshold, more enterprises should be eligible in 2021.

4. Higher Credit Limits

Due to the rise in qualifying earnings in 2021, employers will be eligible for a larger credit. You may submit claims worth a maximum of $7,000 per quarter in 2021 and a maximum of $21,000 per employee for the entire year. There has been considerable growth from one year to the next in this.

5. What Is a Large Employer?

Additionally, it’s critical to pay attention to how the ERC legislation distinguishes between “large” and “small” enterprises. In 2020, businesses with more than 100 full-time employees were categorized as large employers. In 2021, these criteria were revised to include organizations with more than 500 full-time staff members.

Large businesses are only allowed to claim salaries for workers who did not perform any services. Since the criteria were altered, more firms were eligible to claim the full credit in 2021.

6. Holders of PPP Loans May Apply for the ERC

The ERC and the PPP were established by the CARES Act to assist employers in keeping their personnel levels and obtaining critical support during the closures and losses caused by the COVID-19 epidemic.

Businesses that first obtained a PPP loan were not eligible to apply for the ERC. These phrases, however, were altered by subsequent law. Now, even if you obtained a PPP loan, you are eligible to apply for the ERC. Simply said, you cannot compute your credit using the same salaries that were paid for the money from your PPP loan.

7. A Few Government Employers Are Included

According to the CARES Act, “any employer operating a trade, business, or a tax-exempt organization, but not governments, their agencies, and their instrumentalities” was qualified for the ERC. In 2021, the ERC was broadened to cover certain governmental employers. Such as those that fall under section 501(c)(1) and are tax-exempt, as well as institutions or universities that specialize in offering medical or hospital care services.

8. Limited to Recovery Startup Businesses in the Fourth Quarter of 2021

The IIJA restricted recovery startup firms to the final quarter of 2021, thus these companies might be eligible for all four quarters of 2021. Only the first three quarters of 2021 are available to other firms.

After the CARES Act expanded and extended the ERC so that more businesses were qualified and could claim the credit for longer quarters, the majority of the adjustments were implemented through legislation. Even so, they had to close due to a court ruling or risk losing revenue.

Questions About ERC Changes?

It’s critical to be aware of how COVID-19 relief law is evolving and what those changes represent for your company. At Your Part Time Accountant, we’re here to support you through it all. Our tax credit specialists are aware of how all of these changes affect companies like yours, and we can help you decide the best course of action going forward.