A Closer Look: Understanding the Evolving Employee Retention Credit from 2020 to 2021

A Closer Look: Understanding the Evolving Employee Retention Credit from 2020 to 2021

As the global business landscape continues to undergo significant changes in response to the COVID-19 pandemic, employers are finding themselves facing new challenges when it comes to retaining their employees. In an effort to support businesses and preserve jobs, the government introduced the employee retention credit (ERC) in 2020. However, the program has since evolved in response to ongoing economic developments and is set to continue into 2021.

The ERC was initially established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. This tax credit was designed to provide financial assistance to businesses that were impacted by the pandemic, offering a refundable payroll tax credit for wages paid by eligible employers impacted by the crisis. In addition, it also aimed to prevent layoffs and furloughs by easing the financial burden on employers.

Initially, the ERC was only available to businesses that did not receive a loan through the Paycheck Protection Program (PPP). However, the Consolidated Appropriations Act, 2021, expanded the eligibility criteria for the credit. Now, businesses can claim the credit even if they have received a PPP loan, as long as the wages used to qualify for the credit are not also used for PPP loan forgiveness.

Another significant change to the ERC in 2021 is the increase in the credit percentage. In 2020, the credit covered up to 50% of qualified wages, with a maximum credit of $5,000 per employee for the year. However, in 2021, the credit has been increased to cover up to 70% of qualified wages, with a maximum credit of $7,000 per employee per quarter. This expansion aims to provide further financial relief to businesses and encourage them to retain their employees amid ongoing economic uncertainties.

Furthermore, the American Rescue Plan Act, signed into law in March 2021, further extended and expanded the ERC. The Act allows eligible employers to claim the credit for an additional six months, through December 31, 2021 and also increases the maximum credit amount to $28,000 per employee for the year.

These changes and extensions demonstrate the government’s continued commitment to supporting businesses and preserving jobs during the ongoing economic challenges posed by the pandemic. The evolving nature of the ERC underscores the importance of staying informed and up to date on the latest regulations and eligibility criteria to maximize the benefits for businesses and employees alike.

In conclusion, the employee retention credit has proven to be a valuable resource for businesses striving to maintain their workforces during the pandemic. The expansion and extension of the credit into 2021 demonstrate the government’s commitment to providing ongoing support to employers and employees. Businesses should take advantage of these opportunities to alleviate financial burdens and retain valuable employees. Staying informed and working with financial and tax professionals will be key to ensuring that businesses can navigate these changes effectively and make the most of the available benefits.