If you scour the tax code, you’ll find plenty of tax deductions for businesses, but a limited number of tax credits. Unfortunately, not being aware of the tax credits available can mean leaving money on the table you could have claimed.
One such credit is the Employee Retention Credit (ERC). The ERC gives you credits for keeping people on your payroll during the COVID-19 pandemic in 2020 and 2021. To qualify, you need to have paid wages during the pandemic when your business partially or fully shut down or experienced a significant drop in income.
Though this may seem simple to understand, the requirements to qualify for the ERC are much more complicated than the summary paragraph you just read.
To complicate matters more, if you compare the rules for 2020 that are part of the CARES Act to the Relief Act of 2021, the American Rescue Plan Act of 2021, and the Infrastructure Investment and Jobs Act (IIJA), you’ll see some substantial changes. Let’s look at six of those important changes.
An ERC Comparison: 2020 & 2021
1. The ERC was raised from a maximum credit of $5,000 per employee in 2020 to $7,000 per employee per quarter in 2021.
2. The IIJA extended the ERC to September 30, 2021 (from December 31, 2020). Startup businesses (companies started after February 15, 2020, and had less than $1 million in annual gross receipts) had the qualifying period extended an additional three months to the end of the fourth quarter of the year.
3. Eligibility for the ERC changed slightly in 2021, and employers must meet one of two qualifications to prove that COVID-19 has impacted their business:
Their business must have been fully or partially restricted because of governmental orders surrounding COVID-19 (such as orders that limited travel, group gatherings, and capacity in certain businesses), OR
They must show that their gross receipts during a quarter declined by at least 20% compared to the same quarter in 2019 or the quarter immediately preceding it (employers that didn’t exist in 2019 can use 2020 quarters).
This differs from the 2020 eligibility rules, which required gross receipts to be less than 50% of their 2019 values.
4. The Relief Act of 2021 changed the criteria for qualified wages for the ERC. As a result, for employers with over 500 full-time employees in 2019, the credit is only available if they elected to pay employees who were not actively working for them at that time.
5. The Relief Act allows employers to claim both the ERC and Paycheck Protection Program (PPP) retroactive to March 27, 2020. Initially, an employer could not claim both.
6. For calendar quarters in 2021, the ERC was expanded to include some tax-exempt organizations and colleges or universities whose principal purpose is to provide medical or hospital care.
Let Bottom Line Concepts Help
Bottom Line Concepts can help clarify any confusion you may have when it comes to the ERC. Our team will determine your business’s eligibility, walk you through the steps from beginning to end, and maximize your claim.