The pandemic wreaked havoc on most small business owners. The government initiated the CARES Act Employee Retention Credit, which has been extremely helpful for businesses. The benefits are directly related to a business’s payroll taxes and benefits. It is a great way for them to claim the employee retention and get money back to help in the future. Let’s dig deeper and see what it can do for businesses.
Coronavirus Aid, Relief and Economic Security Overview
Congress passed the CARES Act in March 2020 for businesses affected by the pandemic. An important part of the legislation was the Employee Retention Credit (ERC), a refundable credit that employers can claim on qualified wages and payroll costs to employees in 2020 and 2021.
This provided relief to an eligible employer that struggled to keep employees on their payroll because the government required them to suspend operations. It is worth noting that the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021, officially sunset the ERC program for wages paid after September 30, 2021.
The tax credit is no longer available after 2021, but employers still have a three-year window to file for the calendar quarter it covers. Under the CARES Act, firms can claim a maximum of $5,000 for each employee in 2020 and around $7,000 per quarter per employee in 2021 for the Employee Retention Credit refund.
Initially, the Corona Virus Response Act prevented employers from receiving both ERTC credit and PPP loans, disqualifying many firms from receiving the tax credits. However, the government has since amended the CARES Act, allowing employers to claim both tax credits as part of the ERC program and apply for a PPP loan. This is even applicable with businesses that took PPP loan forgiveness.
Collosal Federal Government Programs – Important Details that Matter
This was the largest government stimulus program ever, with over $2.2 trillion being disbursed to affected individuals and businesses. By comparison, the 2009 Recovery Act had $831 billion in funds, while the American Rescue Plan Act (ARPA) had $1.9 trillion.
The CARES Act was used for various reasons, including benefits for individuals, relief for small businesses, big and medium-sized businesses, hospital and healthcare assistance, and state and local government.
The law allocates $349 billion for SMEs to help them maintain their payrolls and cover a few expenses throughout the pandemic. Its main objective was to keep employees on the payroll.
Businesses could apply for the Paycheck Protection Program (PPP) and receive up to a maximum of $10 million or 2.5 times their monthly payroll. The loans covered payroll, salaries, benefits, rent, utilities, and interest payments. Fees for the loan were waived, and no collateral was required. Businesses could defer payments for a period of six months up to 12 months, and there were no prepayment penalties.
More importantly, the ERC was also included in the ACT. However, several additions and modifications have been made to ERC since then. The first was funded by the American Rescue Plan Act, and the second by the Consolidated Appropriations Act of 2021.
Determining Eligibility CARES Act Employee Retention Credit
Employers qualify for the tax credit based on the calendar quarter. Let’s take a look at some of the dates and eligibility requirements.
March 13, 2020, to December 31, 2020 – Second through fourth quarter
Throughout this period, your business qualifies if it:
● Was forced to partially or fully suspend business activities due to the pandemic from a governmental authority
● Saw a massive decline in gross receipts (defined by less than 50% of gross receipts) that could be attributed to COVID-19
January 1, 2021, to September 31, 2021 – First through third quarter
Throughout this period, your business qualifies if it:
● Was fully or partially suspended due to COVID-19 from a governmental authority
● Saw a massive decline in gross receipts (defined by less than 80% of gross receipts) compared to the same calendar quarter in 2019.
Employers that were not operational in 2019 could use 2020 as their comparison year.
October 1, 2021, to December 31, 2021 – Fourth quarter
Most businesses could not qualify for the ERC for this period because of the Infrastructure Investment and Jobs Act. The new amendment officially sunset ERC in Q4 2021 to recovery startup businesses.
This disqualifies employers who weren’t a recovery startup businesses from ERC for wages paid to employees after September 30, 2021.
What Do Qualified Wages Mean for ERC?
Qualified wages are a complicated topic that changes from year to year. ERC qualified wages paid are amounts that employers pay to employees in the form of cash wages, including hourly wages, vacation pay, salaries, and other taxable wages.
Specifically, employers can get a tax credit for wages that they paid to employees who were unable to work due to government orders or a significant decline in the company’s gross profits.
For the period of 2019 to 2020, if your firm had over 100 employees, then you could only claim qualifying wages for employees that you retained but who were not able to work.
In 2021, if your business had over 500 employees or more, you could only claim qualifying wages for employees you retained but could not work.
And if you had fewer than 100 employees in 2019 and 2020, you could claim the credit for all of your employees. For 2021, businesses that employ fewer than 500 employees could claim credit for all their employees.
What is the Comparison Between the CARES, CAA, and ARPA?
Here’s how the three acts differ when applied to Employee Retention Credit:
CARES Act: Employers, including PPP recipients, can claim a tax credit against 50% of qualifying wages between March 31 and December 31, 2020, up to $10,000 per employee per year. Moreover, businesses are eligible if their gross receipts fall below 50% compared to 2019.
Consolidated Appropriations Act: Employers can now claim a credit against 70% of qualified wages paid. This time around, companies can claim a tax credit up to a maximum of $10,000 per employee per quarter for Q1 and Q2 2021. There should be a more than 20% decline in gross receipts at the beginning of 2021 compared to 2019.
American Rescue Plan Act: The credit is capped at 70% of qualified wages up to a maximum of $10,000 limit per quarter, allowing a maximum of $7,000 per quarter for all of 2021.
Clearing Up the CARES Confusion
As you can tell, the ERC can be confusing to work on because the IRS keeps revising the rules every year. And things can get more complicated if you’re not on top of your paperwork.
This is why it is recommended to work with an expert when dealing with the Employee Retention Credit. Federal Tax Credits FTCO has helped thousands of businesses through the ERC process. Reach out to us if you have any questions or would like a pre-qualification check. We would love to be of service to you.
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