Updating the Employee Retention Credit for 2021

The Employee Retention Credit, or ERC, was passed as part of a package of business relief measures in the CARES Act, which was Congress' first response to the COVID-19 pandemic.

The tax credit was designed to encourage employers to keep their employees on the payroll, despite government-mandated closures and falling sales, and many companies took advantage of it—but some were also left out due to restrictions imposed by the law.

At the end of 2020, Congress updated the ERC, making it available to more companies for a longer period of time. So how will that impact your business and employee retention efforts?

The Employee Retention Credit, at a glance

According to the IRS, the Employee Retention Credit is open to companies and certain tax-exempt organizations that have experienced either a suspension of their operations due to governmental orders or a decline in gross receipts when compared to a certain quarter.

The refundable tax credit is applied against certain employment taxes equal to 50-70% of an employee's "qualified wages," up to $10,000 per employee. Employers can access the credit by reducing their payroll tax deposits or requesting an advance credit from the IRS.

What changes have been made to the ERC?

Congress has made a variety of changes to the ERC, with some of them applying to both 2020 and 2021, and others applicable only to this year. The most notable changes include:

• The updated Employee Retention Credit has been extended through June 30, 2021. It was originally scheduled to end at the end of 2020.
• Eligibility for the tax credit has also been expanded. Companies that can show a quarter-over-quarter decline in gross receipts of 20% or more can now claim the credit, down from the 50% mark in 2020. Companies that secured Paycheck Protection Program (PPP) loans are also eligible to claim the credit for any qualified wages that will not be forgiven under the PPP. They were previously ineligible for the ERC.
• The update also raises the credit to 70% of an employee's qualified wages (including certain health care expenses), of up to $10,000 per quarter, for 2021. That's up from 2020's 50% rate and $10,000 cap for the entire year.
• Per the updated language, businesses with 500 or fewer full-time employees can now define qualified wages as those paid to all employees during a period when operations were suspended or the company experienced a decline in gross receipts. That ceiling was previously set at 100 employees.

What does this mean for my company?

Thanks to Congress' action, if your company was impacted by COVID-19 but remained open, did not experience a sharp enough drop in gross receipts or received PPP funds, you may now benefit from the ERC.

The change in the amount of wages that qualify for the ERC also means the potential for more financial relief for your business. An employer can now claim $7,000 per employee for the first two quarters, for a total credit of $14,000 in 2021.

Have more questions on the ERC and how it could impact your payroll operations? Call the payroll experts at Future Systems for specific guidance and help maximizing your credit.