By Dan Covell
The Coronavirus Aid, Relief and Economic Security Act, also known as the CARES ACT was enacted in April 2020. The Employee Retention Credit (ERC), under the CARES ACT encouraged businesses to keep employees on their payroll. Since this enactment, the ERC provision has been impacted twice… and, can tend to be complicated should you not have followed the changes.
Under the Consolidated Appropriations Act of 2021 and then the American Rescue Plan Act, ERC was extended then expanded. The ERC can now be claimed through December 31, 2021 by eligible employers who retained employees during the COVID-19 pandemic. With this in mind, the recent IRS notice is important in understanding how to apply upcoming changes to Form 941, which is necessary to claim your credit. Eligibility, qualified wages and how the credit works are all important to understand prior to calculating your benefit. Also, keep in mind that the ERC also delineates by law and date because, depending on whether you took a Paycheck Protection Program Loan (PPP Loan) and when you claim the credit… there are different requirements.
With the continued expansions to ERC, nearly every employer qualifies for this tax credit. Employers are encouraged to take advantage of this expansion as such a qualified employee can bring up to $33,000 to the employer. Let’s take a look at who is eligible.
Private employers, including non-profits that:
- Have operations full or partially suspended as a result of COVID-19
- Have experienced a significant decline in gross receipts as a result of the coronavirus pandemic
- Startups do qualify
- Employers who took a PPP Loan are also eligible to take the Employee Retention Credit (ERC)
Ok, but how much is the tax credit?
- For 2020, 50 percent of the first $10,000 in compensation or $5,000 per employee.
- For 2021, 70 percent of the first $10,000 per quarter in compensation or $28,000 per employee.
Now, let’s look at how the credit is paid.
If your ERC is larger than your social security tax liability, you will get a direct refund from the IRS for the difference. The credit is normally claimed on your federal employment tax returns using Form 941. An amendment can be made to your Form 941 if it’s determined that you qualify after you have already filed. Eligible employers can file for an advance on the ERC, and you can claim your credit immediately by reducing payroll taxes sent to the IRS.