COMPREHENSIVE OVERVIEW ON EMPLOYEE RETENTION CREDIT – 2020 AND 2021.

Most small businesses have suffered losses and continue to face challenges due to the Covid-19 pandemic. To support them, the US government has come up with the Employee Retention Credit (ERC) (which was set up in) under the CARES Act. This program aims to give resources to eligible businesses.

ERC at a glance

  • The ERC provides a refundable tax credit to help businesses with the cost of keeping their staff employed.
  • This program will be active throughout in 2021.
  • For the year 2021, the refundable tax credit is: 70% of qualified wages paid per employee (up to a maximum amount of $7,000 per employee, per quarter and up to $28,000 for the entire year).
  • For tax year 2020, the refundable tax credit is: 50% of qualified wages paid per employee (up to a maximum amount of $5000 per employee for the entire year)
  • If taxpayer qualifies for ERC but doesn't get a chance to claim it, they may do so retroactively (back to March 27, 2020) on Form 941-X.

Comparison showing (What’s changed) changes made recently with the Employee Retention Credit (ERC)?

There have been many changes to ERC in 2020-21. Here is an overview of the same:

2020 2021 (Q1 and Q2) 2021 (Q3 and Q4)
March 13, 2020 – December 31, 2020 January 1, 2021 – June 30, 2021 July 1, 2021 – December 31, 2021
Eligible employers must have between 1 – 100 W2 employees (excluding the owners) Eligible employers must have between 1 – 500 W2 employees (excluding the owners) Eligible employers must have between 1 – 500 W2 employees (excluding the owners)
Eligible businesses must have been in operation before February 16, 2020. Eligible businesses must have been in operation before February 16, 2020. It is possible to be eligible if you started your businesses after February 15, 2020; if your gross receipts are under $1M, you may qualify as a Recovery Start-up Business.
The maximum credit amount per employee is $5,000 for the year. The maximum credit amount per employee is $7,000 for the quarter ($28,000 for the year). The maximum credit amount per employee is $7,000 for the quarter ($28,000 for the year).
Credit is 50% of qualified wages. Credit is 70% of qualified wages. Credit is 70% of qualified wages.
To qualify for ERC, you must see a decline of 50% in gross receipts when comparing corresponding quarters in 2020 and 2019. To qualify for ERC, you must see a decline of 20% in gross receipts when comparing. corresponding quarters in 2021 and 2019. To qualify for ERC, you must see a decline of 20% in gross receipts when comparing. corresponding quarters in 2021 and 2019.

What are criteria of a Full Time Employee as per ERC?

An employee who works at least 30 hours per week or 130 hours in a month is defined as a full-time employee.

What makes a Business Eligible for ERC?

Whether an employer is eligible for ERC depends on one of two key factors:

  • Full or partial closure due to a government order.
  • A significant decline in gross receipts (this decline is different for tax year 2020 and tax year 2021).

How does the number of employees factor into the ERC?

Employers with 500 or fewer full-time employees can apply the ERC towards all qualified wages paid to employees during those quarters, whether or not employees were working at the time.

Employers with more than 500 full-time employees can apply the ERC only for employees who were not working during a quarter because the business suspended operations or had a significant decline in gross receipts.

Please note:

Employee wages are ineligible for ERC if:

  • The employee is a family member of the owner,
  • Own 50 percent or more of the company, and /or
  • The wages are being used to claim the Work Opportunity Tax Credit (WOTC) under section 51 of the Internal Revenue Code.
  • Any business that received any other government relief provisions may not be eligible for ERC

    We hope this information provides you with some insight on the ERC. Please check out our other blogs on different aspects of the same.

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