The Consolidated Appropriations Act of 2021 introduced the Employee Retention Credit for qualifying businesses. The American Rescue Plan Act of 2021 (ARPA) enhanced the Employee Retention Credit (ERC) and extended it for an additional six months, through December 31, 2021.
The ERC is a big deal. It can put tens of thousands of dollars directly in your pocket to help offset your cost of paying employees in 2020 and 2021. The possible ERC is $5,000 per employee for 2020 and $28,000 per employee for 2021. That’s $33,000 per employee.
2020 Employee Retention Credit
You have two ways to qualify:
- You had a gross receipts drop during a 2020 calendar quarter of more than 50 percent when compared to the same calendar quarter of 2019. The more than 50 percent test is the trigger for the ERC, and you automatically qualify for that quarter and the following 2020 quarter.
- You suffered from a federal, state, or local government order that fully or partially suspended your operations (under this rule, you qualify for the ERC on the days you suffered the full or partial suspension, even if you did not lose any money).
Employers are eligible for credits equal to 50% of wages paid to each employee during 2020 up to a maximum of $5,000 ERC credit per employee for 2020.
2021 Employee Retention Credit
You have three ways to qualify in 2021:
- You suffered a federal, state, or local government order that fully or partially suspended your operations (under this rule, you qualify for the ERC on the days you suffered the full or partial suspension, even if you did not lose any money).
- Your gross receipts for a 2021 calendar quarter are less than 80 percent of gross receipts from the same quarter in calendar year 2019.
- As an alternative to number 2 above, using the preceding quarter to your 2021 calendar quarter, your gross receipts are less than the comparable quarter in 2019.
Employers are eligible for credits equal to 70% of wages paid to each employee per quarter up to a maximum of $10,000 wages per quarter per employee. There is a potential maximum credit of $28,000 ERC credit per employee for 2021.
Recovery Startup Business
If you started a new business on or after February 15, 2020, your business qualifies to participate in the ERC. The American Rescue Plan Act of March 2021 introduced a new category of businesses that qualify for the ERC.
To be considered a Recovery Startup Business, an employer must have the following:
- Began carrying on a trade or business after February 15, 2020
- Not have average gross receipts for the 3-year period exceeding $1 million
- Doesn’t otherwise qualify due to a suspension in operations or significant reduction in gross receipts
Employers are eligible for credits equal to 70% of wages paid to each employee per quarter up to a maximum of $10,000 wages per quarter per employee.
Recovery Startup Businesses are allowed to claim the ERC for the 3rd and 4th quarters of 2021, subject to a cap of $50,000 per quarter. For qualifying businesses, the total potential benefit for 2021 is $100,000.
ERC and Other Programs
You may not double-dip and qualify for both ERC and other programs. Wages you use for the ERC may not be used for the Paycheck Protection Program (PPP), family leave credit, or similar COVID-19 programs.
