If you’re familiar with the Employee Retention Credit (ERC), which was signed in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), you’ve probably noticed some significant changes in the program since its inception. Three additional important acts have been passed that amended the CARES Act of 2020:
- Relief Act of 2021
- American Rescue Plan Act of 2021
- Infrastructure Investment and Jobs Act (IIJA)
The IRS has published a comparison chart aptly named the “Employee Retention Credit – 2020 vs. 2021 Comparison Chart,” designed to explain the changes to the ERC since it was first passed. You may find the chart challenging to follow (like many IRS documents), so we’ve broken out some important changes pertaining to the tax year 2021.
Before we do that, let’s confirm what the ERC is:
The federal government established the Employee Retention Credit in 2020 to provide a refundable tax credit to help businesses of all sizes with the cost of keeping staff employed. Eligibility for the ERC is based on a business experiencing a substantial decline in gross receipts or being closed due to a government order.
ERC Changes for Tax Year 2021
Here is a summary of some of the most significant changes to the ERC program since its inception in 2020:
For calendar quarters in 2021, it expanded to include certain governmental employers that are:
- Organizations described in section 501(c)(1) and exempt from tax under section 501(a), and
- Colleges or universities whose principal purpose is to provide medical or hospital care
Employment tax offset
Changed from the employer’s portion of Social Security tax to the employer’s portion of Medicare tax.
While the Relief Act of 2021 and the American Rescue Plan Act of 2021 extended the ERC through 2021, the IIJA limited availability of the ERC for the fourth quarter of 2021 to a recovery startup business as defined in section 3134(c)(5) of the Code.
“Recovery startup businesses” are employers:
- That began carrying on any trade or business after February 15, 2020
- That had average annual gross receipts under $1,000,000 for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined, and
- Do not meet the other eligibility criteria
Percent of qualified wages eligible for the tax credit
Changed for the tax year 2021 from a maximum of 50% of qualified wages to 70% ($10,000 per employee per calendar quarter, including certain healthcare expenses).
Additionally, for the third and fourth calendar quarters of 2021, “severely financially distressed employers” may treat all wages as qualified wages during the calendar quarter in which the employer is severely financially distressed (“severely financially distressed employers” are eligible employers due to a qualifying decline in gross receipts).
Increased the maximum per employee from $5,000 per employee in 2021 to $7,000 per employee per quarter in 2021.
In its comparison chart document, the IRS also gave a reminder that if you filed Form 941-X to claim the Employee Retention Credit, you must reduce your deduction for wages by the amount of the credit. Therefore, you may need to amend your income tax return (e.g., Forms 1040, 1065, 1120, etc.) to reflect that reduced deduction.
It’s not too late to file Form 941-X and claim your Employee Retention Credit for 2021 and/or 2021. Contact Bottom Line Concepts today to find out if you qualify.