Many businesses have retained employees during the COVID-19 pandemic and enjoyed tax relief with the help of the employee retention credit (ERTC). The recent signing of the American Rescue Plan Act (ARPA) brings good news: there is now a employee retention credit extension.
As originally introduced under last year’s CARES Act, the ERTC was a refundable tax credit against certain employment taxes equal to 50% of qualified wages, up to $10,000, that an eligible employer paid to employees after March 12, 2020, and before January 1, 2021. An employer could qualify for the ERTC if, in 2020, there was a:
The definition of “qualified wages” depends on staff size. If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those paid to employees who aren’t providing services because operations were suspended or due to the decline in gross receipts. Qualified wages may include certain health care costs and are capped at $10,000 per employee. These employers could count wages only up to the amount that the employee would’ve been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages. This also includes health care costs and capped at $10,000 per employee, paid to any employee during the period operations were suspended or the period of the decline in gross receipts. This is regardless of whether employees are providing services.
Under the Consolidated Appropriations Act (CAA), signed into law at the end of 2020, the Employee Retention Credit extension is applicable through June 30, 2021. The CAA also expanded the ERTC rate of credit from 50% to 70% of qualified wages. The law further expanded eligibility by:
Most recently, the ARPA further extended the ERTC from June 30, 2021, until December 31, 2021. The 70% of qualified wages is also extended for this period, as is the allowance for up to $10,000 in qualified wages for any calendar quarter. This means an employer could potentially have up to $40,000 in qualified wages per employee through 2021.
We can help you determine whether your business qualifies for the employee retention credit extension and, if so, how much the credit may reduce your tax bill.