Essential Points
- The Employee Retention Credit (ERC) was introduced in March 2020 as part of the CARES Act.
- Recent changes have widened the eligibility criteria, enabling more businesses to qualify.
- ERC application deadlines have been extended, allowing businesses more time to apply.
- The maximum credit has been raised, providing up to $26,000 per employee for 2021.
- Keeping accurate records is crucial for businesses seeking to claim the credit, as documentation requirements are strict.
Recent Changes and Guidelines for the Employee Retention Credit
The Employee Retention Credit (ERC) has been updated several times since it was first introduced in March 2020. These changes are intended to provide further assistance to businesses affected by the COVID-19 pandemic. Let’s take a closer look at the latest changes and how they might benefit your business.
What’s New in the Employee Retention Credit?
The Employee Retention Credit (ERC) was launched under the CARES Act to help businesses keep their employees on the payroll. Since then, it has seen numerous legislative updates that have broadened its coverage and advantages.
A crucial change is the broadening of the qualifying conditions. In the past, companies had to show a substantial drop in gross receipts or a complete or partial closure because of COVID-19. Today, more companies can qualify, including those that have received Paycheck Protection Program (PPP) loans.
Grasping the ERC Eligibility Criteria
It’s important to know who is eligible for the ERC. The eligibility rules have changed, allowing a greater number of businesses to take advantage of this credit.
- Businesses that saw a significant drop in gross receipts compared to the same quarter in 2019.
- Businesses that were completely or partially shut down due to government orders related to COVID-19.
- For 2021, the decline in gross receipts threshold has been lowered from 50% to 20%.
In addition to that, the American Rescue Plan Act of 2021 extended the ERC through the end of 2021, which increases the potential benefits for businesses. This means you can claim up to $7,000 per employee per quarter, up to a total of $26,000 per employee for the year.
Latest News on ERC
Updates on Who Can Apply
At first, only businesses that did not get a PPP loan could apply for the ERC. But now, businesses that did get a PPP loan can also apply for the ERC. They just can’t use the same wages for both programs.
One of the key updates is the lowering of the gross receipts decline threshold. In 2020, businesses were required to demonstrate a 50% reduction in gross receipts for the same quarter in 2019. This threshold has been reduced to 20% for 2021, making it more accessible for businesses to be eligible.
Updated Deadlines
The deadlines to apply for the ERC have been extended. Previously, businesses had until the end of 2020 to claim the credit. However, the American Rescue Plan Act has extended this deadline, allowing businesses to claim the ERC for wages paid until December 31, 2021.
The extension gives businesses extra time to collect the required paperwork and apply for the credit. It’s crucial to keep track of these deadlines to make sure you don’t miss out on any possible benefits.
“The American Rescue Plan Act of 2021 has extended the ERC until the end of 2021, which increases the potential benefits for businesses.”
How to Claim the Employee Retention Credit
To claim the Employee Retention Credit (ERC), you must follow several steps, from determining your eligibility to filing the necessary forms. This comprehensive guide will help you navigate the process and maximize your benefits.
Check If You’re Eligible
The first thing you need to do to claim the ERC is to see if your business is eligible. The eligibility requirements have been updated, so you need to look at the most recent requirements:
- See if your company’s gross receipts have significantly dropped compared to the same quarter in 2019.
- Confirm if your company had to fully or partially close due to government COVID-19 orders.
- For 2021, make sure your company meets the reduced 20% gross receipts decline threshold.
In addition, if your company received a Paycheck Protection Program (PPP) loan, you might still be eligible for the ERC, as long as you don’t use the same wages for both programs.
How to Calculate Qualified Wages
After you’ve figured out if you’re eligible, the next thing you need to do is calculate the qualified wages. Qualified wages are the wages you’ve paid your employees during the periods you’re eligible for. For 2021, the ERC lets you claim up to $7,000 per employee per quarter.
This is how you can easily compute for qualified wages:
Qualified Wages = Total Wages Paid to Eligible Employees + Qualified Health Plan Expenses
Don’t forget to add in any qualified health plan expenses that you paid on behalf of your employees. This will help you get the most out of the credit you’re claiming.
Complete the Required Paperwork
If you’re looking to claim the ERC, you have to fill out certain paperwork for the IRS. The main form you’ll need to fill out to get the credit is Form 941, Employer’s Quarterly Federal Tax Return. If you didn’t claim the credit on your first Form 941, you can file a corrected return with Form 941-X.
Here’s how to fill out the required paperwork:
- For every quarter you wish to claim the ERC, you must fill out Form 941.
- Include the total amount of eligible wages and the amount of credit you’ve calculated.
- If necessary, use Form 941-X to modify previous returns.
ERC Documentation Requirements
When claiming the ERC, it’s important to have the right documentation. The IRS mandates that businesses keep accurate records to back up their claims. This documentation should be kept for a minimum of four years from the date the tax is due or paid, whichever comes later.
Important Paperwork
Make sure to have the following paperwork on hand when applying for the ERC:
- Employee wage records for the eligible periods.
- Any government orders that resulted in a full or partial suspension of your business operations.
- Records of gross receipts for the relevant quarters to show the decline in revenue.
- Expenses incurred on health plans for your employees.
Keeping Accurate Records
Keeping accurate records is not only for compliance but also to ensure you can substantiate your claims if audited. Here are some tips to help you keep your records organized:
- Track and document employee wages and health plan expenses using a dependable payroll system.
- Save copies of all government orders and notices that affected your business operations.
- Update your financial records regularly to reflect gross receipts and other relevant data.
- Keep all documentation in a secure and organized manner for easy retrieval.
ERC’s Potential Impact on Businesses
The ERC can significantly benefit businesses by providing much-needed financial relief during difficult times. By reducing payroll tax liabilities, businesses can allocate resources to other vital areas, such as operational expenses and growth initiatives.
Case Studies of Businesses That Have Benefited
Let’s take a look at some real-world examples of businesses that have reaped the benefits of the ERC:
“ABC Manufacturing, a small Midwest business, saw a 30% drop in gross receipts in the second quarter of 2021. They claimed the ERC and received a $50,000 credit, which helped them keep their employees and pay essential bills.”
“XYZ Retail, a family business, had a partial shutdown due to local government orders. They used the ERC to claim $70,000 in credits, which helped them keep their employees and continue to serve their community.”
The ERC can make a big difference to businesses by providing much-needed financial help during difficult times. By reducing payroll tax liabilities, businesses can put resources into other important areas like operational expenses and growth.
Businesses That Benefited from ERC: Case Studies
Here are a few examples of real businesses that saw benefits from the ERC:
“ABC Manufacturing, a small-scale business in the Midwest, saw a 30% drop in gross receipts in the second quarter of 2021. They were able to claim the ERC and received a $50,000 credit, which allowed them to keep their employees and cover necessary expenses.”
“XYZ Retail, a family-run store, had to partially shut down due to local government orders. They made use of the ERC and claimed $70,000 in credits, which enabled them to keep their staff on the payroll and continue to serve their community.”
Benefits of Using ERC
Using the ERC can provide several benefits for businesses. Here are some of the main advantages:
- Financial Assistance: The Employee Retention Credit (ERC) offers financial assistance by reducing payroll tax liabilities, which can help businesses manage their cash flow more effectively.
- Employee Retention: By offsetting payroll costs, the ERC allows businesses to keep their employees, maintaining workforce stability and morale.
- Operational Continuity: The financial assistance from the ERC can help businesses continue their operations without significant disruptions.
- Growth Opportunities: With the savings from the ERC, businesses can invest in growth opportunities, such as expanding their services or improving their infrastructure.
The most important thing to note is that the ERC is a refundable tax credit. This means that if the credit exceeds the payroll taxes owed, the excess amount is refunded to the business. This can provide a much-needed cash infusion during challenging economic times.
Commonly Asked Questions
Can you explain the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit that was introduced in the CARES Act in March 2020. Its purpose is to aid businesses in keeping their employees during the COVID-19 pandemic by reducing their payroll tax liabilities.
Can my business qualify for ERC?
Your business might qualify for the ERC if it fulfills these requirements:
- Had a noteworthy drop in gross receipts in comparison to the same quarter in 2019.
- Endured a complete or partial halt in operations due to government orders related to COVID-19.
- For 2021, businesses must show a drop in gross receipts of at least 20% compared to the same quarter in 2019.
How can I apply for the Employee Retention Credit?
To apply for the ERC, follow these steps:
- Check if you meet the eligibility criteria outlined above.
- Compute the qualified wages you paid to your employees during the periods you were eligible.
- Submit Form 941, Employer’s Quarterly Federal Tax Return, to claim the credit for each quarter.
- If necessary, submit Form 941-X to correct previous returns and claim the credit retroactively.
What records do I need to keep for ERC?
Keeping accurate records is critical when claiming the ERC. Make sure you have the following documents:
- Payroll records that show the wages you paid to employees during the eligible periods.
- Documentation of any government orders that led to a full or partial suspension of your business operations.
- Records of gross receipts for the relevant quarters to show the decrease in revenue.
- Health plan expenses that you incurred on behalf of your employees.
Can I apply for ERC if I got a PPP loan?
Yes, businesses that got a Paycheck Protection Program (PPP) loan can apply for the ERC. However, you can’t use the same wages for both the PPP loan forgiveness and the ERC. Make sure you allocate wages properly to get the most benefits from both programs. For more details, check out this article on Employee Retention Credit changes.
To sum up, the recent amendments to the Employee Retention Credit offer substantial potential for businesses to secure financial aid and bolster employee retention. By grasping the eligibility requirements, working out qualified wages, and keeping precise records, businesses can make the most of the benefits from the ERC. Keep up to date with the newest changes and deadlines to make sure you fully exploit this worthwhile credit.
