As we enter 2021, entrepreneurs need to be aware of the employee retention credit (ERC) and how it can benefit their businesses. The ERC was introduced as part of the CARES Act in response to the COVID-19 pandemic and has been extended and expanded in the latest stimulus package.
The ERC is a valuable tax credit designed to help businesses keep employees on their payroll during the economic downturn caused by the pandemic. It is available to employers who have experienced a significant decline in gross receipts or were subject to a full or partial suspension of operations due to government orders related to COVID-19.
So, what do entrepreneurs need to know about the employee retention credit in 2021?
First and foremost, it’s important to understand that the ERC is a significant financial incentive for business owners to retain and pay their employees. The credit is equal to 70% of qualified wages paid to employees, up to $10,000 per employee per quarter. This means that businesses can potentially receive up to $7,000 in tax credits for each eligible employee per quarter.
The ERC is now available for the entire year of 2021, providing businesses with a longer period to take advantage of this valuable tax credit. Additionally, the credit is retroactively available for 2020, so business owners can potentially claim the credit for wages paid last year.
The eligibility criteria for the ERC have been modified and expanded for 2021. Previously, businesses that received a Paycheck Protection Program (PPP) loan were not eligible for the ERC. However, the latest stimulus package has removed this restriction, allowing PPP loan recipients to also claim the tax credit. This is great news for many businesses that had previously been excluded from the ERC.
It’s important for entrepreneurs to work closely with their tax advisors to maximize the benefits of the ERC. Proper documentation and record-keeping are crucial to ensure compliance with the eligibility requirements and to support any claims for the tax credit. This includes keeping records of the decline in gross receipts, any government orders that led to the suspension of operations, and the calculation of qualified wages.
In summary, the employee retention credit is a valuable resource for entrepreneurs looking to navigate the challenges posed by the ongoing pandemic. The extended and expanded ERC provides a significant financial incentive for businesses to retain and pay their employees, and the removal of the PPP loan restriction further expands the potential benefits for eligible businesses.
As we move forward in 2021, entrepreneurs should take advantage of the ERC to support their businesses and help ensure the retention of valuable employees. With the help of tax advisors and careful record-keeping, businesses can make the most of this valuable tax credit and set themselves up for success in the year ahead.