Future of Employee Retention Credit: IRS Changes Explained

The landscape of the Employee Retention Credit (ERC) has undergone significant changes as the IRS adapts to the evolving economic conditions. This vital provision, initially created to incentivize businesses to retain employees during the COVID-19 pandemic, has seen several updates that business owners need to be aware of. In this article, we unravel the future of ERC and explain the key changes introduced by the IRS.

1. Introduction to the Employee Retention Credit

The ERC was enacted under the CARES Act in March 2020 as a fiscal measure to help businesses keep employees on their payroll during the height of the pandemic. Since its inception, the credit has provided substantial financial relief to eligible businesses by allowing them a refundable tax credit against certain employment taxes.

2. Key Changes in the Employee Retention Credit

In response to the ongoing economic recovery, the IRS has implemented several changes to the ERC. Understanding these changes can help businesses maximize their benefits under this program.

• Expansion of Eligibility: Initially, the ERC was limited to businesses that experienced a significant decline in gross receipts. However, recent changes have broadened eligibility to include more businesses affected by the pandemic.
• Increased Credit Amount: The amount of credit available has been increased. For 2021, businesses can claim up to 70% of qualified wages paid per employee per quarter, compared to 50% in 2020. The maximum credit per employee for 2021 is $7,000 per quarter.
• Extension of Deadlines: The IRS has extended the deadline for claiming the ERC. Businesses now have up to three years from the end of the applicable quarter to file amended payroll tax returns and claim the credit.
• Recovery Startup Business Provisions: New provisions have been introduced for recovery startup businesses, allowing newer businesses that began operations after February 15, 2020, to qualify for the credit under certain conditions.
• Interaction with PPP Loans: Previously, businesses that received Paycheck Protection Program (PPP) loans were not eligible for the ERC. However, recent changes now allow businesses to claim both, provided they do not use the same wages for both credits.

3. How to Claim the Employee Retention Credit

Claiming the ERC involves a few critical steps for businesses to follow:

• Determine Eligibility: Assess if your business meets the current eligibility criteria based on gross receipts decline or partial/full suspension due to government orders.
• Calculate Qualified Wages: Accurately calculate the qualified wages paid to employees during the relevant periods. Note that wages for which PPP loan forgiveness is claimed cannot be included.
• File Payroll Tax Returns: File Form 941, Employers Quarterly Federal Tax Return, to claim the ERC. Businesses that missed claiming the credit in previous quarters can file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return, for amendments.
• Keep Detailed Records: Maintain detailed records of the calculation and claim process, including documentation of the eligible periods, wage calculations, and the impact of government orders on your business operations.

4. Future Outlook and Conclusion

The future of the ERC continues to look promising as the IRS aims to support businesses in their recovery journey. The recent changes reflect a more inclusive approach, broadening the scope of eligibility and increasing the potential financial relief available to businesses.

The IRS is likely to continue evaluating the economic environment and might introduce further changes to enhance the ERC's effectiveness. Staying informed and proactive is crucial for businesses to leverage these benefits optimally.

The ongoing evolution of the ERC underscores the importance of expert guidance in navigating these changes. As the IRS modifies its provisions, businesses should remain vigilant and consult with tax professionals to ensure they maximize their eligible credits while complying with regulatory requirements.

How to Save on Taxes

Understanding and leveraging tax credits such as the ERC can significantly impact your bottom line. To ensure you are making the most of available tax-saving opportunities, its essential to seek professional advice. Our team of experts is here to help you navigate complex tax regulations and optimize your tax strategy. Schedule a call with our team here to start saving on your taxes today!