Employee Retention Credit | Leaf Tax Consultants

The COVID-19 pandemic brought new challenges for business owners. You may have had difficulties with declining business, government shutdowns, or significant disruption to your supply chain. The U.S. Government created the CARES Act to help offset the repercussions of the pandemic. As part of the CARES Act, they introduced the Employee Retention Credit. The ERC created tax credits for any business or non-profit affected by the pandemic that met certain criteria. The tax credit is based on wages paid to W-2 employees during a specified period of time. Businesses have until 2025 to file for the ERC.

Now, if you started a new business during the pandemic, the American Rescue Plan also added tax credit opportunities for you. The ARP designated new businesses as recovery startup businesses. This gives tax credits to businesses created after February 15, 2020, that do not meet the other criteria specified in the ERC.

What is the Employee Retention Credit?

The Employee Retention Credit, along with CARES Act, was passed in March 2020. Since then, the ERC has evolved to be more beneficial to businesses and ensure that businesses get the full benefit. If you started a new business during the pandemic or were affected by government shutdowns, you may qualify for the ERC.

If you were running a busy restaurant in February of 2020 and the pandemic forced you to close your doors for some period of time or drastically reduced your gross receipts, the ERC allows you to receive a tax credit for some of the W-2 wages paid at the time. The maximum benefit changed as the economy continued to rehab from the pandemic. In 2021, the benefit increased to a maximum of $7,000 per employee per quarter through Q3 2021, for a total of up to $21,000 per employee for the year (Originally for 4 quarters until Q4 was taken away in the American Rescue Plan)

Depending on your business and the area of the country where you work, the effects of the pandemic may have been longer lasting than others. The ERC can be used for any quarter between March 13, 2020 to Dec. 31, 2021.

Here’s how the maximum credit changes beginning with the CARES act and continuing with the American Rescue Plan.

	CARES Act	Relief Act	American Rescue Plan
Effective Dates	March 20, 2020 – December 13, 2020	January 1, 2021 – June 30, 2021	July 1, 2021 – December 31, 2021
Percentage of qualified wages eligible	Up to 50% of qualified wages for the year	Up to 70% of qualified wages per calendar quarter	Up to 70% of qualified wages
Maximum Credits	Up to $5,000 per employee in 2020	Up to $7,000 per employee per quarter	Up to $7,000 per employee per quarter
W-2 Employee Requirement	100 or less W-2 employees	500 or less W-2 employees	500 or less W-2 employees

Does my company qualify for the ERC?

The Employee Retention Credit was originally earmarked for companies that met certain qualifications.

The Relief Act and the American Rescue Plan modified those qualifications to help more businesses take advantage of the program.

Under the CARES act, any business or non-profit that meets the following criteria is eligible for the ERC:
A full or partial shutdown of business operations because of government mandates or
Significant decline in gross receipts comparable to 2019

Did COVID affect my business enough to qualify?

The ERC uses two criteria to decide if a business can get a tax credit. The first stipulation depends on if a government mandate created a full or partial shutdown of your business. This could also mean that a supplier for your business was shut down or limited. For example, if you owned a restaurant affected by the government’s limited in-house seating or you had to close your restaurant for a specific amount of time, you would qualify for the ERC.

The ERC also says that if a business had a significant decline in gross receipts, it may also qualify for the tax credit. To qualify for the ERC in 2020, you had to have a decline at least 50%, compared to the same quarter of the previous year. In 2021, the ERC changed so that businesses only needed a 20% decline in gross receipts.

The Relief Act, which expanded the ERC to 2021, also expanded which businesses qualify for the ERC. In 2021, some governmental employers, including colleges, universities or businesses that provide medical or healthcare.

The ERC also specifies how many employees a company can have to qualify. The CARES act limited the ERC to companies with 100 or fewer W-2 employees. In 2021, the Relief Act expanded that requirement to 500 or less employees. For businesses over this threshold, the ERC can be used if a specific department had a significant impact from the pandemic.

Does my company qualify for the ERC?

If you started a business during the pandemic and don’t qualify for the ERC, you may be eligible as a recovery startup business. Businesses that qualify are eligible for the ERC during the third and fourth quarters of 2021.

To qualify, a business must meet these requirements:

Established after February 15, 2020
Have not had another business with revenue above $1 million per year
Do not meet the criteria of the ERC

The Employee Retention Credit is great for companies across all industries, including

Manufacturing
Technology
Construction
Medical
Real Estate
Engineering
Hospitality
Food & Beverage