In the wake of the COVID-19 pandemic, small businesses faced unprecedented challenges, grappling with operational disruptions and declining revenues. To support these struggling enterprises and encourage employee retention, the Employee Retention Credit (ERC) emerged as a lifeline, providing much-needed relief through refundable tax credits.
However, it is crucial for businesses to recognize the key differences in how the ERC operated before and after the enactment of the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021. The IIJA retroactively eliminated most employers’ ability to claim the ERC for wages paid after September 30, 2021, significantly impacting eligibility and the timeline for filing.
This article aims to shed light on the key changes that businesses need to understand regarding the Employee Retention Credit in 2020 and 2021. While the credit may no longer be available for 2023, businesses still have an opportunity to file for eligible periods if they have yet to do so, making understanding these amendments all the more critical.
|Employee Retention Credit 2020||Employee Retention Credit 2021|
|Period for qualified wages paid||March 13, 2020 – December 31, 2020||January 1, 2021 – December 31, 2021|
|Eligible Wages||2020: Wages paid after March 12, 2020, and before January 1, 2021||2021: Wages paid after December 31, 2020, and before January 1, 2022|
|Eligible Employers||Employers engaged in trade or business activities or operating as tax-exempt organizations, excluding governments, their agencies, and instrumentalities||Expanded to include specific governmental employers, including:|
Organizations described in section 501(c)(1) that are tax-exempt under section 501(a)
Colleges or universities or institutions primarily dedicated to providing medical or hospital care.
|Employee Count||Small business: 100 or fewer average full-time employees in 2019 providing and not providing services|
Large business: Greater than 100 average full-time employees not providing services
|Small business: 500 or fewer average full-time employees in 2019 providing and not providing services|
Large business: Greater than 500 average full-time employees not providing services
|Gross Receipts Test||A decline of 50% or more in gross receipts compared to the same quarter in 2019||A decline of 20% or more in gross receipts compared to the same quarter in 2019 or an alternative quarter|
|Credit Cap||50% of qualified wages ($10,000 per employee for the year including certain health care expenses)||70% of qualified wages, up to $10,000 per employee per quarter (total credit capped at $28,000 per employee)|
What is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) has emerged as a vital component of the government’s relief efforts to support businesses amidst the challenges posed by the COVID-19 pandemic.
Initially introduced in the CARES Act relief package, the ERC has undergone significant amendments and extensions through subsequent legislation, including the Taxpayer Certainty and Disaster Relief Act, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act.
These updates have expanded the ERC’s eligibility criteria and extended its duration, making it accessible to a broader range of businesses.
The ERC is basically a refundable tax credit given to employers who retained their employees, even during the uncertainty of the pandemic. It provides financial relief to eligible employers who have experienced either a significant decline in gross receipts or were partially or fully suspended due to government-mandated pandemic restrictions.
To ensure businesses are aware of the employee retention deadlines and can take full advantage of the ERC, it is important to stay informed. For detailed information on these deadlines, you can read our Employee Retention Credit Deadlines article.
For a comprehensive understanding of how the ERC works, including practical examples, you can refer to the Employee Retention Credit Guide.
Can I still benefit from the ERC this 2023?
Yes, you can. While the availability of the ERC does not extend to tax years 2023 and beyond, you still have the opportunity to apply for eligible periods retroactively.
Deadlines for ERC Claims
- For all quarters in 2020 (Q1-4):
- The deadline to file ERC claims is April 15, 2024.
- For all quarters in 2021 (Q1-4):
- The deadline to file ERC claims is April 15, 2025.
ERC 2020 vs 2021: Period Covered
The ERC has undergone several changes in terms of the period covered for qualified wages paid. Initially, when the CARES Act was implemented in March 2020, the ERC’s period covered qualified wages paid from March 13 to December 31, 2020.
Subsequent legislation expanded the ERC’s coverage period. With the Relief Act of 2021, the period was extended from January 1 to June 30, 2021, allowing businesses to continue benefiting from the credit.
Furthermore, the American Rescue Plan Act of 2021 introduced another extension, broadening the ERC period from July 1, 2021, to December 31, 2021. This extension aimed to provide additional relief and support to businesses affected by the ongoing challenges of the pandemic.
However, it’s important to note that with the enactment of the Infrastructure Investment and Jobs Act (IIJA), the coverage period of the ERC was retroactively amended. Availability of the credit in the fourth quarter of 2021 is now limited to recovery startup businesses.
ERC 2020 vs 2021: Eligibility
In 2020, eligible employers had to meet the following criteria:
- Full or Partial Suspension: Employers that carried on a trade or business during the calendar year 2020, including tax-exempt organizations, had to experience a full or partial suspension of operations during any calendar quarter in 2020 due to governmental orders restricting commerce, travel, or group gatherings related to COVID-19.
- Significant Decline in Gross Receipts: The trade or business must have experienced a significant decline in gross receipts during any calendar quarter in 2020. The decline was defined as a quarter with gross receipts less than 50% of the same quarter in 2019.
In 2021, amendments were made to the eligibility criteria, specifically for the decline in gross receipts:
- Decline in Gross Receipts: Employers needed to show a decline in gross receipts for a calendar quarter in 2021, where gross receipts were less than 80% of the same quarter in 2019. For employers not in existence in 2019, the comparison substituted 2020 for 2019.
It’s important to note that a reduction in gross receipts in the fourth quarter of 2020 could qualify an employer for the ERC in the first quarter of 2021.
ERC 2020 vs 2021: Eligible Qualified Wages
2020 Eligible Qualified Wages: In 2020, businesses were eligible to claim a credit amounting to 50% of the qualified wages paid to employees. These qualified wages had a maximum limit of $10,000 per employee for all quarters of the year.
2021 Eligible Qualified Wages: In 2021, the ERC increased to 70% of the qualified wages paid to employees. Similarly, the maximum limit for qualified wages remained at $10,000 per employee per quarter.
ERC 2020 vs 2021: Employee Count
The criteria for employee count in relation to the Employee Retention Credit (ERC) underwent changes between 2020 and 2021. Let’s break down the requirements for each year in a simpler manner:
2020 Employee Count:
- For businesses with 100 or fewer full-time employees in 2019, all employee wages were eligible for the credit calculation, regardless of whether they were still working or furloughed.
- For businesses with more than 100 average full-time employees in 2019, only the wages of furloughed or reduced-hour employees due to closure or reduced sales qualified for the credit.
2021 Employee Count:
- Amendments were made for 2021. The maximum credit now applies to wages paid to 500 or fewer average full-time employees in 2019, regardless of whether they were providing services or not. This was a significant change compared to the 2020 rules.
- Additionally, the maximum credit on qualified wages for employees not providing services was increased for businesses with more than 500 average full-time employees in 2019.
- The maximum credits remained unchanged with the enactment of the American Rescue Plan (ARP) Act.
- There were provisions for “severely financially distressed employers” during the third and fourth quarters of 2021, allowing them to treat all wages as qualified wages for the severely distressed period.
- Employers not in existence in 2019 could use the average number of full-time employees in 2020 to determine eligibility for the credit.
- With the enactment of the Infrastructure Investment and Jobs Act (IIJA), the rules regarding “decline in gross receipts” and “severely financially distressed employers” no longer applied in the fourth quarter of 2021.
Understanding the changes in employee count requirements for each year helps businesses determine their eligibility for the ERC and maximize the benefits accordingly.
ERC 2020 vs 2021: Credit Maximums
The ERC also underwent changes in terms of the maximum credit amount between 2020 and 2021. Let’s break it down in a simpler manner:
2020 Credit Maximum:
- In 2020, the maximum credit per employee was $5,000.
2021 Credit Maximum:
- In 2021, the maximum credit per employee increased to $7,000 per quarter.
- With the introduction of the American Rescue Plan (ARP), the quarterly maximum credit remained the same. However, a provision was added for “Recovery startup businesses” which limits their credit to $50,000 per calendar quarter.
When it comes to the implementation of the Employee Retention Credit (ERC), it’s clear that significant changes have occurred, bringing both challenges and opportunities for businesses seeking to maximize the benefits.
In terms of eligibility, the ERC expanded in 2021, allowing more businesses to qualify. Amendments were made to the criteria for employee count, making it more inclusive for certain categories of employers. The qualifying decline in gross receipts also underwent modifications, adjusting the revenue thresholds for eligibility.
Furthermore, the percentage of qualified wages eligible for the credit increased in 2021, offering businesses a higher potential benefit. This change incentivized employers to retain their employees and provide necessary financial support during challenging times.
Lastly, the credit maximums saw an increase in 2021, providing businesses with the opportunity to claim a higher credit per employee per quarter. However, it is essential to note that specific limitations and provisions, such as those applicable to “Recovery startup businesses,” were introduced to ensure targeted relief and fair distribution of resources.
By staying informed about the changes in eligibility, qualified wages, and credit maximums, businesses can strategically plan their operations and financial management to optimize the benefits offered by the ERC.
Consultation with tax professionals and keeping up to date with official IRS guidance are essential to ensure accurate calculations and compliance with the evolving regulations surrounding the ERC.