Navigating the Changes: Comparing employee retention credit in 2020 and 2021
The COVID-19 pandemic has brought unprecedented challenges for businesses worldwide. Many companies have faced significant disruptions, forcing them to adapt and change their operations to survive. To help businesses weather the storm, the government introduced various relief measures, including the employee retention credit (ERC), which has been crucial in supporting employer retention during these uncertain times. However, as the new year begins, it is important for businesses to understand the changes and updates made to the ERC in 2021.
The employee retention credit was initially introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. It was designed to provide eligible employers with a refundable tax credit to help retain their employees during the pandemic. The credit was available to businesses that either experienced a significant decline in gross receipts or were subject to a full or partial suspension of operations due to government orders.
In 2020, the employee retention credit provided a credit equal to 50% of qualified wages paid to employees, up to a maximum of $10,000 per employee per year. This credit was available for wages paid between March 13, 2020, and December 31, 2020. Eligible employers could claim the credit by offsetting it against their payroll taxes or requesting an advance payment from the IRS.
However, with the passage of the Consolidated Appropriations Act, 2021, the employee retention credit has undergone significant changes. The act extended the availability of the credit through June 30, 2021. Additionally, it increased the percentage of qualified wages that could be claimed as a credit to a whopping 70%, up from 50% in 2020. This enhancement makes the ERC an even more attractive option for employers struggling to retain their workforce.
Under the new legislation, businesses with up to 500 full-time employees can claim the credit for wages paid to employees during a period when they were either fully or partially suspended due to government orders, or when they experienced a significant decline in gross receipts. A “significant decline” refers to a decline of 20% or more in gross receipts in a quarter in 2021, compared to the same quarter in 2019. Employers who started their businesses in 2019 can use an alternative comparison period.
Furthermore, the maximum credit per employee per year has been increased to $14,000 for wages paid in 2021, up from $10,000 in 2020. This means that eligible employers can claim up to $7,000 per quarter, per employee, for qualified wages. The expanded scope and increased benefit of the employee retention credit offer notable relief to businesses burdened by the ongoing pandemic.
It is important for employers to consult with tax professionals or advisors to ensure they fully understand the eligibility criteria and can accurately calculate their credit. The complexity of the legislation and constant updates make it essential to stay up to date with the latest guidance from the IRS and the U.S. Department of the Treasury.
In conclusion, the employee retention credit has been a vital lifeline for businesses navigating the challenging economic landscape caused by the COVID-19 pandemic. The enhancements made in 2021, such as the increased percentage of qualified wages and the extended availability, provide additional support and relief for employers. By understanding and utilizing this credit, businesses can better manage their cash flow, retain their employees, and ultimately emerge stronger as the economy gradually recovers.