Changes to the IRS Employee Retention Credit: All You Need to Know
Did you know that the ERC rules changed in 2021? These changes mean that many businesses that were told they did not qualify in the past make now actually be able to claim this credit. So, it is important that you consult with a CPA that is experienced with the ERC credit and all of the changes that were made. Ensure you do this before the deadline so that you received the maximum credit that you deserve!
The IRS Employee Retention Credit (ERC) was introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 to help businesses impacted by the COVID-19 pandemic. The credit underwent several changes after its inception, with the latest modifications announced in the Consolidated Appropriations Act of 2021. In this article, we will explore the changes made to the ERC in 2021 and how they allow more businesses to qualify for this credit.
What is the Employee Retention Credit?
The Employee Retention Credit is a refundable tax credit that allows eligible employers to claim a credit for a percentage of qualified wages paid to their employees during a specific period. The credit is available to businesses that experienced a significant decline in gross receipts or that were fully or partially suspended due to COVID-19.
Changes to the Employee Retention Credit in 2021
The Consolidated Appropriations Act of 2021 made some significant changes to the Employee Retention Credit, including the following:
- Expansion of Eligibility: The ERC was originally available only to businesses that experienced a significant decline in gross receipts or were fully or partially suspended due to government orders. However, the 2021 changes allow more businesses to qualify for the credit. Businesses that were not fully or partially suspended but experienced a decline in gross receipts of more than 20% in a quarter compared to the same quarter in 2019 are now eligible for the ERC.
- Increase in Credit Percentage: The credit percentage has been increased from 50% to 70% of qualified wages paid to eligible employees. This means that eligible employers can now claim a credit of up to $7,000 per employee per quarter, up from $5,000.
- Extension of Credit Period: The ERC was originally available for wages paid between March 13, 2020, and December 31, 2020. However, the 2021 changes extend the credit period to wages paid between January 1, 2021, and December 31, 2021.
- Advance Payment Option: Eligible employers can now receive an advance payment of the ERC by reducing their federal employment tax deposits. This option is available for the first two quarters of 2021 and can provide much-needed cash flow for struggling businesses.
How do these changes benefit businesses?
The changes made to the ERC in 2021 allow more businesses to qualify for the credit and receive higher credit amounts. The expansion of eligibility to businesses that experienced a decline in gross receipts of more than 20% means that businesses that were not fully or partially suspended but still experienced a significant impact from the pandemic can now benefit from the ERC. The increase in credit percentage and extension of the credit period provide more relief to eligible businesses, while the advance payment option can help them with their cash flow needs.
Conclusion
The Employee Retention Credit has undergone significant changes in 2021, providing much-needed relief to eligible businesses impacted by the pandemic. The changes to the eligibility criteria, credit percentage, credit period, and advance payment option have expanded the scope and benefits of the ERC. If you are a business owner, it's essential to understand these changes and take advantage of the credit if you qualify. Consult with your tax advisor or accountant to determine your eligibility and maximize the benefits of the ERC.
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