The employee retention credit (ERC) has been a lifeline for many businesses during the COVID-19 pandemic. It is a refundable tax credit that was originally introduced as part of the CARES Act in March 2020 and has since been extended and expanded through various pieces of legislation, including the Consolidated Appropriations Act of 2021 and the American Rescue Plan Act of 2021.
One of the key aspects of the ERC is that it is designed to help businesses keep employees on their payroll, even if they are not fully operational due to the economic impact of the pandemic. As such, it is available to businesses that have experienced a significant decline in gross receipts or have been partially or fully suspended due to government orders related to COVID-19.
So, how much are businesses eligible to receive through the ERC? The amount of the credit is determined based on the qualified wages paid to employees during the eligible period. For 2020, the credit was equal to 50% of qualified wages, up to a maximum of $10,000 per employee for the entire year. This means that the maximum credit per employee for 2020 was $5,000.
For 2021, the credit has been significantly enhanced. The credit is now equal to 70% of qualified wages, up to a maximum of $10,000 per employee per quarter. This means that the maximum credit per employee for each quarter of 2021 is $7,000, for a total maximum credit of $28,000 per employee for the year.
In addition, the eligibility criteria for the ERC has been expanded, making more businesses eligible for the credit. This includes businesses that experienced a decline in gross receipts of 20% or more in a quarter compared to the same quarter in 2019, as well as businesses that were not in existence for all or part of 2019.
It’s important to note that the ERC is a refundable tax credit, which means that if the amount of the credit exceeds the employer’s share of Social Security tax liability for a quarter, the excess is treated as an overpayment and refunded to the employer.
Overall, the ERC has been a valuable source of financial relief for businesses during the pandemic, helping them to retain employees and navigate the challenges brought on by COVID-19. Businesses that believe they may be eligible for the ERC should consult with a tax professional to ensure they take full advantage of this important credit.