As we enter 2021, businesses continue to grapple with the financial impact of the COVID-19 pandemic. One program that can provide much-needed relief is the employee retention credit (ERC), which was established as part of the CARES Act to help businesses retain employees during the economic downturn.
The ERC has been expanded and extended under the Consolidated Appropriations Act, 2021, making it an even more valuable resource for businesses. However, to take advantage of this program, businesses need to understand the eligibility criteria. Here’s what businesses need to know about the employee retention credit eligibility criteria in 2021.
First and foremost, businesses must have experienced a significant decline in gross receipts to be eligible for the ERC. Under the CARES Act, a business was considered eligible if its gross receipts for a calendar quarter were less than 50% of what they were in the same quarter the previous year. With the extension and expansion of the ERC, the threshold has been lowered to 20%, making the credit available to more businesses.
In addition to the decline in gross receipts, businesses that were fully or partially suspended by a government order due to COVID-19 are also eligible for the ERC. This means that businesses that were forced to close or limit their operations as a result of government mandates can also take advantage of the credit.
Furthermore, in 2021, businesses of all sizes are now eligible for the ERC. Previously, businesses with more than 100 employees were not able to claim the credit for wages paid to employees who were not providing services due to a government order or a significant decline in gross receipts. However, this restriction has been removed under the new legislation, allowing businesses of all sizes to benefit from the ERC.
It’s important to note that businesses that receive Paycheck Protection Program (PPP) loans are still eligible for the ERC. However, the same wages cannot be used to qualify for both programs. This means that businesses cannot use the same wages to calculate both the PPP loan forgiveness and the ERC.
In order to claim the ERC, businesses must file Form 941, Employer’s Quarterly Federal tax Return, and report their qualified wages and the amount of the credit. Any excess credit can be refunded or used to offset the business’s federal employment tax liability.
The employee retention credit is a valuable tool for businesses struggling in the wake of the COVID-19 pandemic. By understanding the eligibility criteria and taking advantage of this program, businesses can benefit from much-needed financial relief while retaining their valuable employees. As always, businesses should consult with their tax and legal advisors to ensure full compliance with the program’s requirements.