What is the difference between the employee retention credit for 2020 vs 2021?
Understanding the differences between the Employee Retention Credit (ERC) and internal revenue code for 2020 and the internal revenue service for 2021 is essential for businesses aiming to maximize their own tax credits for payroll costs and benefits. In this article, we delve into the key aspects of the ERC and provide a detailed comparison between the 2020 and 2021 versions internal revenue code, making it easier for businesses to navigate these complex regulations.
Key ERC Credit Takeaways You Will Learn:
- Understanding ERC: Grasping the fundamental concept and purpose of how the Employee Retention Credit work.
- Eligibility for ERC: Learning the criteria for ERC eligibility and how to determine your status.
- ERC in 2020 vs 2021: Recognizing the major differences in ERC between 2020 and 2021.
- ERC Calculation: Mastering the process to accurately calculate your Employee Retention Credit.
- Claiming ERC: Discovering the proper steps to claim your ERC, potentially up to $26,000 per employee.
See Important 2024 Employee Retention Tax Credit Deadline Information at the Bottom of This Article.
Employee Retention Credit ERC 2021
The Employee Retention Credit (ERC) is a refundable tax credit designed to encourage businesses to retain employees during periods of economic hardship. The ERC was initially introduced under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 and subsequently modified and extended under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021.
Eligibility Criteria for ERC
To be eligible employer qualify for the ERC, employers must meet the following requirements:
- Operate a trade or business during the calendar year.
- Experience a full or partial suspension of operations due to a government order related to COVID-19, or experience a significant decline in gross receipts.
The criteria for a significant decline in gross receipts vary between 2020 and 2021. For 2020, a decline in gross receipts of more than 50% in a calendar quarter compared to gross receipts in the same same calendar quarter in 2019 is required. For 2021, a decline in average annual gross receipts of more than 20% in an entire quarter of a first calendar quarter as compared to the same quarter in 2019 is needed.
2020 vs 2021: Major Differences
The main differences between the 2020 and 2021 versions of the ERC are as follows:
- Credit Cap: For 2020, the maximum credit amount is $5,000 per employee. In 2021, the cap increases to $7,000 per employee per quarter, allowing a potential total credit of $28,000 per employee for the year.
- Credit Percentage: The 2020 ERC covers 50% of qualifying wages up to $10,000, while the 2021 ERC covers 70% of qualifying wages up to $10,000 per quarter.
- Gross Receipts Decline: To qualify for the 2020 ERC, businesses must have experienced a greater than 50% decline in gross receipts. For 2021, the threshold is lowered to a greater than 20% decline.
- Employee Count: In 2020, the ERC is applicable to businesses with 100 or fewer full-time employees. For 2021, this threshold is increased to 500 or fewer full-time employees.
| Aspect | 2020 | 2021 |
| Credit Cap | $5,000 per employee | $7,000 per employee per quarter |
| Credit Percentage | 50% of qualifying wages up to $10,000 | 70% of qualifying wages up to $10,000 per quarter |
| Gross Receipts Decline | >50% decline in gross receipts | >20% decline in gross receipts |
| Employee Count | 100 or fewer full-time employees | 500 or fewer full-time employees |
Calculating Employee Retention Credit through Decline in Gross Receipts and Qualified Wages Paid
To calculate the ERC, follow these steps:
- Determine Eligibility: Ensure your business meets the eligibility requirements, including the full or partial suspension of operations or significant decline in gross receipts. If you started your business on or after February 15, 2020, find out if you qualify as a recovery startup business.
- Identify Qualifying Wages: Qualified wages paid include salaries, hourly pay, commissions, and other compensation, as well as the cost of providing health benefits. For 2020, if your business has 100 or fewer full-time employees, all employee wages qualify. For 2021, if your business has 500 or fewer full-time employees, all employee wages qualify.
- Apply Credit Percentage: For 2020, apply a 50% credit rate to qualifying wages up to $10,000 per employee. For 2021, apply a 70% credit rate to qualifying wages up to $10,000 per employee per quarter.
- Calculate the Total Credit: Multiply the credit percentage by the qualifying wages, considering the applicable credit cap for each employee.
Claiming Employee Retention Credit
Eligible employers can claim maximum credit for qualified wages under the ERC by reporting their total qualified wages and the corresponding credits on their federal employment tax return, typically using Form 941, Employer’s Quarterly Federal Tax Return. Employers with qualified wages can also benefit from the maximum credit amount in their advance payments or by reducing their federal employment tax deposits. If the anticipated credit exceeds the available federal employment tax deposits, eligible employers also can request an advance payment from the IRS using Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Impact on PPP Loans and ERC
Originally, businesses that received a Paycheck Protection Program (PPP) loan were not eligible to claim the ERC. However, under the Consolidated Appropriations Act of 2021, this restriction was lifted, allowing eligible businesses that received PPP loans to also be an eligible employer to claim the ERC. Eligible employers should note that the same wages per employee cannot be used for both PPP loan forgiveness and the ERC.
Frequently Asked Questions (FAQ) for Employee Retention Credit 2020 vs 2021
Can I claim the ERC for both 2020 and 2021?
A: Yes, if your business meets the eligibility criteria for both years, you can claim the ERC for both 2020 and 2021.
Can I claim the ERC for new hires?
A: Yes, the ERC can be claimed for new hires, as long as their wages meet the qualifying criteria.
Can I claim the ERC for independent contractors?
A: No, the ERC is applicable only to wages paid to employees and does not cover payments made to independent contractors.
Can non-profit organizations claim the ERC?
A: Yes, non-profit organizations, including tax-exempt organizations, can claim the ERC if they meet the eligibility requirements.
How do I determine the number of full-time employees for ERC eligibility?
A: Full-time employees are defined as those who work an average of at least 30 hours per week or 130 hours per month. Part-time employees’ hours should not be included when determining the number of full-time employees for ERC eligibility.
Can I claim the ERC if I am an owner and the only employee of my business?
A: No, business owners and their family members are not considered qualified employees for the purpose of the ERC. Wages paid to these individuals do not qualify for the credit.
Are there any limits on the types of businesses that can claim the ERC?
A: There are no specific limits on the types of businesses that can claim the ERC, as long as they meet the eligibility requirements related to the suspension of operations or decline in gross receipts.
How do I amend my payroll tax return if I didn’t claim the ERC initially?
A: To amend your payroll tax return and claim the ERC retroactively, you can file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to correct any errors on your previously filed Form 941.
How does the ERC impact my business’s overall tax liability?
A: The ERC directly reduces your business’s federal employment tax liability. If the credit exceeds your federal employment tax liability, the excess is refundable, which can result in a payment from the IRS.
What documentation is required to support my ERC claim?
A: Eligible businesses should maintain documentation demonstrating their eligibility for the ERC, such as records showing a decline in gross receipts or the impact of government orders on their operations. Additionally, keep records of qualified wages paid to employees, including payroll registers, timecards, and any relevant employee benefits expenses.
Conclusion and Summary for the Comprehensive Guide to Employee Retention Credit: 2020 vs 2021 Comparison
In conclusion, understanding the nuances of the Employee Retention Credit (ERC) for 2020 and 2021 is crucial for businesses striving to maximize their tax benefits during these challenging economic times. This comprehensive guide has provided detailed information on the key aspects of the ERC, enabling businesses to make informed decisions and navigate the complex regulations with ease.
We have explored the eligibility criteria for the ERC, which include operating a trade or business during the same quarter, the third quarter or the fourth quarter of the same calendar quarter or year and experiencing a full or partial suspension of operations due to a government order related to COVID-19 or a significant decline in gross receipts. The article has also highlighted the major differences between the 2020 and 2021 versions of the ERC, such as the credit cap, credit percentage, gross receipts decline threshold, and employee count.
Additionally, we have outlined the process of calculating the ERC, which involves determining eligibility, identifying qualifying wages, applying the tax credit by percentage, and calculating the total applicable employment tax return amount per employee credit amount. Moreover, we have discussed how to claim the ERC on federal employment tax returns and the potential impact of the ERC on payroll taxes for businesses that received PPP loans.
Furthermore, we have addressed several frequently asked questions, covering topics such as eligibility for non-profit organizations, the definition of qualified wages for full-time employees, claiming the ERC for qualified wages for new hires, and the documentation required to support an ERC claim. These answers provide valuable insights and practical guidance for businesses seeking to take advantage of the ERC.
By leveraging the information provided in this guide, businesses can better understand the Employee Retention tax Credit, and its implications for employee retention and payroll costs, ensuring that they effectively utilize the tax credit benefits available to those employers qualify for them. Ultimately, a thorough comprehension of the ERC can help businesses improve their financial stability and navigate the uncertainties brought about by the COVID-19 pandemic with greater confidence.
Employee Retention Tax Credit (ERC / ERTC) Help: Claim Up To a $26,000 Refund Per Employee for Your Business
Disaster Loan Advisors™ can assist your business with the complex and confusing Employee Retention Credit (ERC) and Employee Retention Tax Credit (ERTC) program, without you having to pay an excessive percentage of your hard earned ERC refund.
DLA doesn’t charge a percent like many companies do. Our flat fee structure is fair and reasonable based on the amount of work involved. Keep More of Your Refund™
Depending on eligibility, business owners can receive up to $26,000 to $33,000 per employee based on the number of W2 employees you had on the payroll in 2020 and 2021.
The ERC / ERTC Program is a valuable IRS tax credit you can claim. This is money you have already paid to the IRS in payroll taxes for your W2 employees.
Schedule Your Free Employee Retention Credit Consultation to see what amount $ of employee retention tax credit your company qualifies for.
ERC Deadline Urgency in 2024
April 15, 2024 Deadline for the 2020 ERC Tax Year
The deadline is coming up for the final opportunity to retroactively claim your business Employee Retention Credit for the past 2020 tax year. With the April 15, 2024 deadline fast approaching, we urge you; don’t let this final chance pass!
While not all businesses will qualify, as it depends on multiple factors per IRS Rules and Guidelines, you might be leaving significant financial relief on the table from prior COVID impact to your business during the past 2020 and 2021 business operation years.
Last year, in September 2023, the IRS temporarily paused processing ERC Claims for the remainder of last year. We at Disaster Loan Advisors (DLA) predicted this over one year ago when we made this ERC video warning business owners. See the ten-minute mark of the video for details.
TAKE ACTION NOW IN 2024
Even though the IRS has temporarily paused processing, you will still want to check eligibility and file now (if you qualify) because once the IRS will resume processing, ERC tax credit claims are processed in the order they are received.
If you haven’t previously filed for the ERC Credit, it is worth scheduling a phone call to at least explore your possible eligibility from both the past 2020 and 2021 business tax years. Contact us today for a deep-dive analysis to determine if your business qualifies one or more quarters from the 2020 and / or 2021 tax years.
As a leading dedicated member of the Tax and Accounting Team at Disaster Loan Advisors™, Mark focuses on unlocking the ERC Tax Credit's potential for eligible firms that qualify, providing strategic advice, and detailed guidance to ensure substantial financial recovery and growth. His methodical approach to client engagement includes comprehensive deep-dive analysis, customized consultation and guidance, and a commitment to achieving tangible results for each business served.
Disaster Loan Advisors™ (DLA) offers a comprehensive suite of services designed to navigate the complexities of the Employee Retention Tax Credit (ERC) program, ensuring that qualified businesses leverage the maximum possible benefit with minimum hassle. Unlike some firms that charge exorbitant contingency or percentage-based fees (often between 10% to 30% of your ERC refund), DLA operates on a fair and reasonable, transparent flat-fee structure that aligns with the IRS's guidelines.
If you are looking for an ERC Company that believes in providing professional ERC Services and value for small business owners, in exchange for a fair, reasonable, and ethical fee for the amount of work required, Disaster Loan Advisors™ is a good fit for you. STAY SAFE. STAY COMPLIANT. KEEP MORE OF YOUR REFUND.™
- How Long Do You Have To Claim The Employee Retention Credit? (revised 2024) - April 5, 2024
- When Does The Employee Retention Credit End? (updated 2024) - April 4, 2024
- When Will I Get My Employee Retention Credit? (2024 updates) - April 4, 2024