The Employee Retention Tax Credit (CARES Act) Explained

2020 was truly an unforgettable year and that is not necessarily a good thing. There was not a single place on the globe that was not severely impacted by the novel coronavirus which claimed lives, jobs, finances, and personal well-being.

The Coronavirus Aid, Relief, and Economic Security Act, otherwise known as the CARES Act, was signed into law to provide relief to millions of struggling Americans. The CARES Act is a complex, 300-plus page legal document that contains various initiatives to restore financial stability within the United States.

The most important section of the CARES Act in terms of business professionals and taxpayers is the provision known as the Employee Retention Credit (ERC). The Employee Retention Credit is a refundable payroll tax credit designated for “qualified wages” that are paid to retain full-time employees.

It is important to do your homework and learn more about the various types of financial relief available through the CARES Act along with the Employee Retention Tax Credit. These federal programs can offer financial relief during these difficult times to keep your business afloat.

What Is the Employee Retention Tax Credit (ERC)?

The Employee Retention Tax Credit (ERC) is a provision that is included in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The refundable payroll tax credit is available to “qualified wages” that were paid to retain full-time employees between March 13 and December 31, 2020.

Additionally, the ERC was expanded when Congress signed the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR) in late 2020. The TCDTR Act is part of the Consolidated Appropriations Act (CAA) which not only modified but substantially expanded ECR.

Now, businesses are also able to claim the ERC tax credit for qualified wages throughout the first half of 2021.

The purpose of the Employee Retention Tax Credit, like the name implies, is to keep staff on the payroll even if they are not currently working because of the coronavirus pandemic. The ERC tax credit provides not only wage earners but the small business with financial relief in a year that was extraordinarily difficult for more organizations to remain in operation.

The Employee Retention Tax Credit (ERC) for 2021

The CARES Act presented Americans with many forms of financial relief as individuals, families, and small businesses struggled to survive. The Employee Retention Tax Credit (ERC) originally assisted businesses with a payroll credit that enabled employees to remain on staff even if they were not working during the initial outbreak in March.

Moreover, the U.S. government extended the payroll protection until the end of 2020 thanks to the CARES Act. The Employee Retention Tax Credit received another boost when the TCDTR Act expanded on the previous ERC credit for the first half of 2021.

Thus, the updated Employee Retention Credit (ERC) provides a refundable credit of up to $5,000 for each full-time employee that the organization retained between March 13 to December 31, 2020. Furthermore, the ERC credit applies to up to $14,000 for each retained employee between January 1 to June 30, 2021.

How the ERC Tax Credit Works

The qualifications for the Employee Retention Tax Credit (ERC) are not that complicated. The CARES Act stipulates that any employer that was ordered to partially (or fully) shut down in 2020 qualifies for the tax credit.

Furthermore, the ERC credit applies to organizations with gross receipts that fell below 50 percent for the same quarter in 2019, and below 80 percent for 2021, even if the business never closed amid the pandemic.

The Employee Retention Tax Credit is available immediately to businesses and helps reduce payroll taxes owed to the IRS each year. Consequently, if the credits exceed payroll taxes, then organizations may request a direct refund from the federal government.

Consolidated Appropriations Act (CAA) Modifications to ERC Tax Credit

The Employee Retention Tax Credit officially became law on March 27, 2020. However, the Consolidated Appropriations Act (CAA) expanded on the ERC tax credit to provide more incentives.

Thanks to the CAA Act, employers that receive Paycheck Protection Program (PPP) loans may also claim the ERC for qualified wages that are not treated as payroll costs in obtaining forgiveness of the PPP loan.

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