Understanding the Employee Retention Credit: A Deep Dive into Keeping Employees on the Payroll During the Pandemic

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The Employee Retention Credit (ERC) was established in the United States by the CARES Act in March 2020 to encourage businesses to keep employees on their payroll during the economic uncertainties brought about by the COVID-19 pandemic. The amount a business could receive through the ERC has changed as the program has evolved and as subsequent legislation has been enacted.

Here’s a breakdown of the potential amounts as of my last update in September 2021:

  1. Original ERC under the CARES Act (for 2020)
    • Eligible employers could claim a refundable tax credit against the employer portion of Social Security tax equal to 50% of the qualified wages they paid to employees after March 12, 2020, and before January 1, 2021.
    • The maximum amount of qualified wages for each employee for all calendar quarters in 2020 was $10,000, meaning the maximum credit for an eligible employer for qualified wages paid to any employee was $5,000.
  2. Tax Relief Act of 2020 (changes for 2021)
    • This act extended and expanded the ERC for six months through June 30, 2021.
    • The credit rate was increased from 50% to 70% of qualified wages, and the limit on per-employee creditable wages was raised from $10,000 for the year to $10,000 for each quarter.
    • This meant that in 2021, for the first two quarters, a business could claim up to $7,000 per employee per quarter, for a potential total of $14,000 per employee.
  3. American Rescue Plan Act (ARPA) of 2021 (further changes for 2021)
    • This act extended the ERC from July 1, 2021, to December 31, 2021.
    • The same 70% of qualified wages rule applies, meaning businesses can claim up to $7,000 per employee in Q3 and another $7,000 in Q4. In total, this means an eligible employer could claim up to $28,000 per employee in 2021.

It’s important to note that various qualifications and rules apply to determine if an employer is eligible to claim the ERC, such as experiencing a significant decline in gross receipts or being subjected to specific government shutdown orders. Furthermore, as tax codes and relief provisions can evolve, always consult with a tax professional or the latest guidelines from the IRS when seeking specific financial advice or information about the ERC.

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