Key Updates on Employee Retention Tax Credit for Businesses

In recent times, businesses have faced unprecedented challenges due to the COVID-19 pandemic. As a result, the government has introduced various relief measures aimed at helping enterprises stay afloat during these difficult times, one of which is the employee retention tax credit (ERC). This article will discuss the latest updates related to the ERC as well as the practical implications and benefits for businesses and employees alike.

Understanding the Employee Retention Tax Credit

The ERC is a refundable payroll tax credit designed to encourage employers to retain their workforce amidst the economic downturn caused by the COVID-19 pandemic. It applies to wages paid between March 13, 2020, and December 31, 2021, and offers substantial financial support to eligible businesses. The credit is available to all employers regardless of size, provided they meet specific criteria.

Eligibility Criteria for the ERC

To qualify for the ERC, businesses must fulfill either of the following conditions:

• A full or partial suspension of operations due to government orders related to COVID-19 during any calendar quarter in the qualifying period.
• A significant decline in gross receipts compared to the same quarter in 2019. A drop of more than 50% for wages paid before July 1, 2020, or a reduction of over 20% for remuneration paid from July 1, 2020, to December 31, 2021, is considered significant.

Note that employers who received a Paycheck Protection Program (PPP) loan may still be eligible for the ERC, but can't claim the credit for wages covered by the PPP loan forgiveness.

Updates to the Employee Retention Tax Credit in 2021

Significant changes to the ERC have been enacted via the Consolidated Appropriations Act, 2021 (CAA), and the American Rescue Plan Act of 2021 (ARPA). These updates provide enhanced benefits and extended timeframes for businesses struggling during the pandemic.

Increased Tax Credit Amounts

The maximum credit amount was initially set at 50% of qualifying wages up to $10,000 per employee annually. However, the CAA has increased this percentage to 70% for wages paid between January 1, 2021, and December 31, 2021, effectively raising the maximum credit to $7,000 per employee per quarter or $28,000 annually.

Extended Timeframes for Qualifying Wages

Initially, the ERC was set to expire on December 31, 2020. The CAA extended this to June 30, 2021, and later, the ARPA further pushed the end date to December 31, 2021. Employers can now claim tax credits for qualified wages paid throughout calendar year 2021.

Changes to the Gross Receipts Threshold

As of July 1, 2020, the significant decline in gross receipts threshold has been reduced from a 50% drop to a 20% reduction, making it easier for businesses to qualify for the ERC.

New Provisions for Severance Pay

Effective January 1, 2021, the definition of qualified wages has been expanded to include severance pay as long as it is attributable to a COVID-19-related reason. This enables businesses to claim tax credits on severance payments made to employees during the pandemic.

Employer Retention Credit for New Startups

The ARPA introduced a special ERC provision for startups that began operations after February 15, 2020. Eligible new businesses with yearly gross receipts of up to $1 million can now claim a maximum credit of $50,000 per quarter, significantly benefitting fledgling enterprises during their initial growth stages.

Claiming the Employee Retention Tax Credit

Employers can claim the ERC by reporting their total qualified wages and corresponding credits on their quarterly employment tax return (Form 941). To receive an advance payment of the credit, businesses can submit Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Amending Prior Payroll Tax Returns

If employers have not claimed the ERC for eligible wages paid in previous quarters, they can retrospectively apply for the credit by amending their payroll tax returns using Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.

Maintaining Compliance and Maximizing Benefits

While the employee retention tax credit offers valuable financial assistance to businesses facing the ongoing economic challenges of the COVID-19 pandemic, it is crucial to stay informed about the latest updates and ensure compliance with all eligibility criteria. Consultation with tax professionals and diligent recordkeeping can help employers maximize the benefits of the ERC while minimizing potential errors and oversights.