Take Advantage of the Employee Retention Credit

In the ever-changing landscape of the COVID-19 pandemic, businesses are sailing through uncharted waters, striving to stay afloat while minimizing costs. Among the lifelines extended to businesses during these turbulent times is the Employee Retention Tax Credit (ERTC). Initially introduced in the CARES Act of 2020, this credit has undergone significant transformations through subsequent legislation, including the Consolidated Appropriations Act (CAA) of 2020 and the American Rescue Plan Act of 2021 (ARPA). In this ERC guidance article, we'll delve into these changes and explain why the ERTC could be the financial salvation your business needs.

A Quick Recap: The Original ERTC

Let's begin by revisiting the foundation of the Employee Retention Tax Credit (ERTC) as outlined in the CARES Act. Back in the spring of 2020, this act offered a financial lifeline to businesses by providing a credit against payroll taxes. The objective was to help businesses offset the losses they incurred due to the pandemic. Eligible employers could claim a credit equal to 50% of qualified wages, capped at $10,000, paid to employees between March 12, 2020, and January 1, 2021. Essentially, this meant a maximum credit of $5,000 per employee ($10,000 in wages x 50% tax credit rate).

However, not every business could access this credit without the aid of ERC experts. Eligibility criteria were stringent. To qualify, businesses had to demonstrate a significant impact from COVID-19, either through a shutdown order or a substantial reduction in revenue. Additional restrictions applied to determine which wages qualified, especially for employers with more than 100 full-time employees. Furthermore, businesses couldn't claim credit if they used Paycheck Protection Program (PPP) loans to cover employee payroll costs.

Updates and Expansions: The Evolution of ERTC

The passing of the CAA and the ARPA brought good news for businesses still grappling with the economic repercussions of the pandemic. These laws bolstered and broadened the provisions of the original ERTC. Under the CAA, the ERTC was extended until June 30, 2021, and the tax credit was increased to 70% of qualified wages for the first two quarters of 2021.

With the signing of the ARPA, the ERTC received yet another extension, this time through December 31, 2021.* This means that an eligible employer, present in all four quarters of 2021, could potentially receive up to $28,000 in credits per employee ($10,000 quarterly wage cap x 70% x 4 quarters).

*Note: The signing of the Infrastructure Investment and Jobs Act on November 15, 2021, retroactively ended the ERTC as of September 30, 2021, for all employers other than recovery startup businesses.

ERTC Eligibility: Opening Doors for More Businesses

The original ERTC had strict eligibility criteria that required ERC guidance

to be understood. It was primarily available to businesses that faced shutdowns or experienced a 50% reduction in gross receipts compared to the same quarter in 2019. The CAA introduced a modification, reducing the reduction in revenue to 30%. Under the CAA, businesses met the test if their gross receipts in either of the first two quarters of 2021 were less than 80% of the gross receipts for the same quarter in 2019. The ARPA extends this 80% gross receipts test to the third and fourth quarters of 2021 as well.

ERTC Wage Threshold: A Game-Changing Shift

A significant change benefiting employers in 2021 is the threshold for determining which wages "qualify" for the tax credit. Under the original CARES Act, for businesses with fewer than 100 full-time employees, all wages qualified for the tax credit, regardless of whether an employee's role was affected by the pandemic. In contrast, businesses with over 100 employees couldn't claim the credit for employees who continued to perform services.

Effective January 1, 2021, the CAA raised the threshold to 500 employees. Furthermore, the ARPA, effective July 1, 2021, introduced a new provision for "severely financially distressed employers." These are employers whose gross receipts are less than 10% of the gross receipts for the same quarter in 2019. If a business falls under this definition, it can treat all wages paid to employees as qualified wages, regardless of the number of full-time employees.

Employers with PPP Loans: Another Shot at Relief

Initially, the CARES Act barred employers who received PPP loans from accessing the ERTC. The CAA changed that, allowing employers to claim the credit for wages paid beyond the amount covered by forgiven PPP loans. This change is retroactive to the effective date of the original law: March 12, 2020. If your company received a PPP loan in 2020 but paid qualified wages beyond the loan amount, you could benefit by filing an amended Form 941 and claiming the credit.

Looking for expert advice on claiming the Employee Retention Tax Credit for your business in 2023? Look no further than the team of ERC experts at Claim ERC Credit. They can help you determine eligibility, discuss services, and ensure your business's financial well-being.