Lawmakers have passed many tax breaks for businesses over the last year in an effort to help with fallout from the pandemic. While some programs, such as the Paycheck Protection Program (PPP), have received a significant amount of attention, many other programs are available to help businesses, including the Employee Retention Credit.
The Employee Retention Credit is a tax break available to businesses and is designed to incentivize businesses not to lay off workers by providing them with a tax credit. The employee retention credit was first established in March 2020 as part of the CARES Act and has since been expanded, most recently in March 2021 as part of the American Rescue Plan Act. If you haven’t heard of the employee retention credit, make sure you have the necessary information to take advantage of this credit.
How is the employee retention credit taxed?
The ERC is a fully refundable tax credit equal to 50% of qualified wages paid per employee for the tax year 2020 and 70% of qualified wages paid per employee for tax year 20201. The ERC is applied to your portion of the employee’s Social Security taxes.
Don’t Miss Out on the Employee Retention Credit
Sometimes events can derail even the best-laid business plans and cause companies to worry about their cash flow. In particular, the public health crises and resulting economic crises that businesses dealt with over the last year. In order to help businesses not only persevere but thrive as restrictions ease and businesses fully reopen, the government passed several pieces of legislation to provide relief to businesses.
The Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL), Restaurant Revitalization Fund (RRF), and Shuttered Venue Operator grant are just a few of the programs that have been available to businesses, thanks to the CARES Act (Coronavirus Aid, Relief, and Economic Security) of 2020, the Consolidated Appropriations Act of 2021, and the American Rescue Plan Act. Another program available to companies is the Employee Retention Credit (ERC).
While other programs may have garnered more attention, the Employee Retention Credit (ERC) provides employers with a generous tax credit for retaining employees. When the ERC was originally introduced as a provision under the CARES Act, companies could not qualify for both a PPP loan and the ERC. Now, the ERC has been both extended and expanded under the American Rescue Plan Act. Eligible employers who retained employees during the pandemic can now claim the ERC through Dec. 31, 2021.
What is the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable credit that businesses can claim on qualified wages paid to employees. This is a tax credit against certain payroll taxes, including an employers’ share of social security taxes. If the amount of the tax credit for an employer exceeds the employer’s share of payroll taxes owed, then the excess is refunded.
For the tax year 2020, meaning for wages paid between March 12, 2020, and December 31, 2020, the refundable tax credit is 50 percent of qualified wages paid per employee up to $10,000 per employee and capped at $5,000 per employee for the entire year. If your business is eligible for the ERC for the tax year 2020, and you did not claim the credit, you can file amended payroll tax forms to claim the ERC and receive your tax refund.
For the tax year 2021, the tax credit has been increased to 70 percent of qualified wages paid per employee, up to $7,000 per employee per quarter, and up to $28,000 for the entire year.
To qualify for the ERC, an employer needs to meet one of two criteria:
- Show a significant decline in revenue. For 2021 ERC, businesses need to show a quarterly revenue decline of more than 20 percent when compared to the same quarter in 2019. (For those wanting to claim the 2020 tax year credit, the decline needs to be more than 50 percent when comparing comparable quarters.)
- Show that the business has been impacted by a government-mandated shutdown. This can be either a full or partial shutdown, suspension, or reduction in hours due to a government order. In this case, the credit only applies for the portion of the quarter the business was impacted and not the entire quarter.
Don’t wait to take advantage of the extended Employee Retention Credit. While the American Rescue Plan Act extended the ERC through year-end 2021, it will not likely be extended further. Companies should work with their accountant and payroll specialist to make sure they are taking advantage of the ERC.
Companies have faced many challenges over the last year, but thanks to you, business is still moving forward. With the right products, services, and planning, your local Safeguard Advisor can help you thrive this year. Your advisor will learn about your unique goals and then help make you even more successful with personalized solutions that fit your business. Call 855.778.3124 to get started.
- The Employee Retention Credit is designed to incentivize businesses not to lay off workers.
- The ERC provides employers with a generous tax credit for retaining employees.
- The ERC was originally introduced as a provision under the CARES Act and has been expanded under the American Rescue Plan Act.
- Companies should work with their accountant and payroll specialist to take advantage of the extended Employee Retention Credit.
- With the right products, services, and planning, your local Safeguard Advisor can help you thrive this year.