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Employee Retention Tax Credit Expanded and Extended

Employee Retention Tax Credits

The Employee Retention Tax Credit was extended beyond its original expiration date of December 31, 2020 under the federal coronavirus stimulus bill approved by Congress in late December of 2020 (Consolidated Appropriations Act, 2021, H.R. 133) until June 30, 2021 and extended again by the American Rescue Plan Act (ARPA) through December 31,2021.

UPDATE

The infrastructure bill approved by the Senate on August 10, 2021 (H.R. 3684) would terminate the employee retention credit early, making wages paid after Sept. 30, 2021 ineligible for the credit (except for wages paid by an eligible recovery startup business). Click the button below for more on this…


According to reporting at Accounting Today…

“The package expands the following tax provision:

The Employee Retention Tax Credit (ERTC): The bill extends the credit…and expands the credit by providing a 70 percent credit for up to $10,000 in creditable wages per quarter and reducing the gross receipts decline to 20 percent from 50 percent. The employee retention credit gives businesses of all sizes, including nonprofits, a payroll tax credit for wages paid during a suspension of their business operations or periods where they have experienced significant revenue losses.”

The Employee Retention Tax Credit is a federal hiring incentive established with the 2020 CARES Act to help mitigate the employment cutbacks caused by the coronavirus pandemic. However, there is a previous version of the Employee Retention Tax Credit that focuses on Disaster Relief that is also currently available.  For purposes of clarifying the differences between the two, the current version will be referred to below as COVID ERC, or C-ERC, and the previous version as Disaster ERC, or D-ERC.

COVID-ERC (Employee Retention Tax Credit)

The Coronavirus Aid, Relief, and Economic Security (CARES) Act created a new employee retention tax credit for employers who closed their business operations, partially or fully, and experienced significant revenue losses as a result of COVID-19.

Who Is Eligible?

Private employers, including non-profits, carrying on a trade or business in 2020 through December 31, 2021 that:

  • Had operations partially or fully suspended as a result of orders from a governmental authority due to COVID-19, or
  • Experienced a decline in gross receipts by more than 20% (previously 50% in the CARES Act) in a quarter compared to the same quarter in 2019 (eligibility ends when gross receipts in a quarter exceed 80% of the same 2019 quarter)

As of June 1, 2020, employers who received a Paycheck Protection Program Loan (PPP) were not eligible for this tax credit.  However, the new coronavirus relief packages allow access to both programs while avoiding double-dipping (i.e., any payroll costs covered by a PPP can’t also be used to qualify for the ERTC).

How Much Is The Tax Credit?

C-ERC is a 70% tax credit (previously 50%) for the first $10,000 of earnings paid per quarter after March 12, 2020 and before December 31, 2021 per eligible employee.  This amount can include the employer portion of health benefits.

Basically, for every eligible employee who earned $10,000 or more per quarter during this time period the C-ERC would provide the employer with a $7,000 tax credit (the maximum tax credit allowed per quarter). For January to December 31 2021 this represents a potential $28,000 tax credit per employee kept on the payroll and a combined $33,000 per employee maximum for 2020 and 2021.

How Is The Credit Taken?

The COVID ERC is applied against the employer portion of payroll taxes. And according to the IRS “if the employer’s employment tax deposits are not sufficient to cover the credit, the employer may get an advance payment from the IRS.” Which makes it a lot like a tax refund, with similar cash flow benefit.

Employee Retention Tax Credits
GMG’s Tax Incentive Management System simplifies the process for claiming ERC credits.

For more information, see these IRS FAQs.

DISASTER-ERC

The Further Consolidated Appropriations Act signed on December 20, 2019 included an extension to the existing Employee Retention Credit for employers affected by qualified disasters that occurred during 2018 and 2019.  This Disaster-ERC is a tax credit that has been around for years, specifically focused on areas of disaster.

Who Is Eligible?

Employers who operated in a qualified disaster zone and become inoperable due to the disaster and they continued to pay or incur wages for eligible employees.  Currently (as of June 2, 2020) these areas include 282 counties in the following states:

Alabama, Alaska, Arkansas, California, Florida, Georgia, Hawaii, Indiana, Iowa, Mississippi, Missouri, Nebraska, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, and Wisconsin.

How Much Is The Tax Credit?

D-ERC is a 40% tax credit for up to $6,000 of earnings paid to each eligible employee (making the maximum credit $2,400 per eligible employee). As reported by the Journal of Accountancy, this was increased in the coronavirus stimulus bill passed by congress in December 2020 as follows:

“The bill allows a tax credit of 40% of wages (up to $6,000 per employee) to employers who conducted an active trade or business in a qualified disaster zone (as defined in the bill). The credit applies to wages paid without regard to whether the employee performed any services associated with those wages.”

How Is The Credit Taken?

The Disaster-ERC is a Federal income tax credit and should be filed with the employers tax return.

Summary

Most clients want to know “what do I qualify for”.  Legislation related to Hiring Incentives is constantly changing due to the COVID-19 crisis.  We stay informed and educated about these constant changes and ensure that our clients get the highest amount possible on these employer tax incentives.

To see how much your business may be eligible for, click the button below...

employee retention tax credit calculator