Understanding the Employee Retention Tax Credit Reinstatement Act

The Employee Retention Tax Credit (ERTC) Reinstatement Act is a game-changer for businesses looking to retain employees during economically challenging times. This article will delve into the details of this legislation, detailing its benefits and eligibility requirements, as well as how to apply for it.

A Brief Overview of the Employee Retention Tax Credit

The ERTC was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, with the aim of providing financial relief to businesses affected by the COVID-19 pandemic. The program allows eligible businesses to claim a refundable tax credit against certain employment taxes, helping employers keep their workforce intact even when facing revenue loss.

Key Features of the Initial ERTC

• Applicable Period: The initial ERTC covered wages paid from March 13, 2020, through December 31, 2020.
• Credit Amount: Eligible employers could claim a credit equal to 50% of qualified wages, up to a maximum credit of $5,000 per employee.
• Eligibility Requirements: Employers had to either experience a significant decline in gross receipts (more than 50% decrease compared to the same quarter in 2019) or be subject to government orders partially or fully suspending business operations due to the pandemic.

Changes Introduced by the Employee Retention Tax Credit Reinstatement Act

In response to the ongoing economic challenges faced by businesses, Congress expanded and extended the ERTC through the Taxpayer Certainty and Disaster Tax Relief Act (TCDTRA) in December 2020. This legislation, commonly referred to as the Employee Retention Tax Credit Reinstatement Act, made several important changes to the program.

Extended Applicable Period

Under the new act, the ERTC program was extended for wages paid through June 30, 2021. In addition, the American Rescue Plan Act of 2021 further extended the ERTC for wages paid from July 1, 2021, through December 31, 2021, providing additional relief for struggling businesses.

Increased Credit Amount

The reinstated act significantly increased the credit amount available to employers. For wages paid between January 1, 2021, and December 31, 2021, the credit rate has been raised from 50% to 70% of qualified wages, with a maximum credit of $7,000 per employee per quarter. This means that eligible employers can now claim up to $28,000 per employee for the entire year.

Expanded Eligibility Requirements

The legislation also loosened the eligibility requirements for claiming the ERTC. Employers can now qualify if they have experienced a decline in gross receipts of more than 20% compared to the same quarter in 2019, rather than the previous 50% threshold. Furthermore, businesses that were not in existence during any part of 2019 can use the corresponding quarter in 2020 for comparison purposes.

New Provisions for Small Businesses

The Employee Retention Tax Credit Reinstatement Act introduced special provisions for small businesses, defined as those with 500 or fewer employees. These include:

• Increased Wage Base: Small businesses can claim the ERTC on all wages paid to employees, regardless of whether they were providing services or not. Previously, only wages paid to employees who were not working due to COVID-19-related business disruptions could be claimed.
• Advance Payments: Small employers can request an advance payment of the tax credit before filing their employment tax return. This helps improve cash flow and allows businesses to benefit from the credit immediately.

Applying for the Employee Retention Tax Credit

Employers wishing to claim the ERTC must report their total qualified wages and related health insurance costs for each quarter on their employment tax returns (Form 941). In addition, they must reduce their federal employment tax deposits by the amount of the anticipated credit.

Claiming Retroactive Credits

For eligible employers who did not claim the ERTC for wages paid in 2020, it is still possible to claim these credits retroactively. Businesses can do this by filing an amended employment tax return (Form 941-X) for the relevant quarters.

The Employee Retention Tax Credit Reinstatement Act provides a valuable lifeline for businesses navigating the ongoing economic uncertainties brought about by the COVID-19 pandemic. By understanding the key changes introduced by this legislation and making use of the available tax credits, employers can better support their workforce and maintain financial stability during these trying times.