Employee Retention Credit Deadline 2021: Essential Details and Deadlines

The Employee Retention Credit (ERC) is a refundable tax credit designed to help businesses that continued paying employees despite being shut down or experiencing significant declines in gross receipts due to the COVID-19 pandemic. The credit applies to wages paid from March 13, 2020, to December 31, 2021, with various deadlines for claiming the credit depending on the tax period.

Businesses and tax-exempt organizations are eligible for the ERC if they meet certain requirements, such as experiencing a government-mandated full or partial suspension of operations or a significant decrease in gross receipts. It’s essential for employers to understand the eligibility criteria, qualified wages, and interaction with other relief programs to effectively claim the ERC.

Key Takeaways

  • The Employee Retention Credit helps businesses who continued paying employees during pandemic-related shutdowns or revenue declines.
  • Eligible employers must understand the requirements and interactions with other relief programs for successful claims.
  • Deadlines for claiming the credit vary, with April 15, 2024, for 2020 tax periods and April 15, 2025, for 2021 tax periods.

Employee Retention Credit Overview

The Employee Retention Credit (ERC) is a provision established under the American Rescue Plan to support eligible employers impacted by the COVID-19 pandemic. This tax credit aims to incentivize businesses to retain their employees despite facing economic hardships due to the pandemic.

ERC eligibility varies depending on specific circumstances, and it is essential for employers to understand the requirements and guidelines outlined by the Internal Revenue Service (IRS). In general, among other factors, eligible businesses must have experienced a significant decline in gross receipts or been subject to a full or partial suspension of operations due to the pandemic.

The ERC applies to qualified wages paid after March 12, 2020, and before July 1, 2021. For the tax year 2020, the credit amounts to 50% of up to $10,000 in qualified wages per employee, providing a maximum credit of $5,000 per employee. According to the IRS, eligibility was revised in 2021, and the credit rate was modified for eligible wages paid during this time. It’s essential for employers to follow the applicable guidance for each period to ensure that they claim the credit correctly.

Eligible businesses must file an adjusted employment tax return form to claim the credit. As a confidence-boosting measure, employers should file these forms within two years of payment or within three years of the expiration of the credit period. The deadline is crucial, as businesses can take advantage of this valuable credit as long as they comply with the relevant IRS guidelines.

As a support measure for businesses during the pandemic, the Employee Retention Credit has played a critical role in alleviating some of the financial burdens caused by COVID-19. Although the credit is no longer available for wages paid after June 30, 2021, it remains essential for companies to consider claiming the credit on their previous year’s tax returns to reap the benefits.

Eligibility Requirements

Basic Eligibility Criteria

To be eligible for the Employee Retention Credit (ERC) in 2021, an employer must have been either fully or partially suspended due to government orders related to the COVID-19 pandemic or have experienced a decline in gross receipts. The credit is available to businesses and tax-exempt organizations. The requirements for eligibility vary depending on the time period for which the credit is claimed. More information can be found in the IRS FAQs on Employee Retention Credit.

A decline in Gross Receipts

A key criterion for ERC eligibility is a significant decline in gross receipts. To qualify, a business must have experienced a decline of more than 20% in any 2021 calendar quarter when compared to the same period in 2019. If a business wasn’t in operation in 2019, it can compare its 2021 gross receipts to the same period in 2020.

Severely Financially Distressed Employers

For employers considered severely financially distressed, the definition of qualified wages changes. According to IRS guidance, an employer is considered “severely financially distressed” if gross receipts in a calendar quarter have declined by more than 90% compared to the same quarter in 2019. In such cases, even wages paid to fully employed workers can be considered qualified wages for the ERC.

Recovery Startup Business

The ERC was expanded in 2021 to include recovery startup businesses. A recovery startup business is an employer that started operations after February 15, 2020, has average annual gross receipts of $1 million or less, and does not meet other ERC eligibility criteria. Employers in this category can claim up to $50,000 per calendar quarter in ERC. More details about this expansion can be found in the Treasury and IRS guidance.

Tax-Exempt Organizations

Tax-exempt organizations are also eligible for the ERC, provided they meet the basic eligibility criteria of being fully or partially suspended due to government orders or experiencing a significant decline in gross receipts. The applicable periods and eligibility requirements for tax-exempt organizations can be found in the IRS guide.

Qualified Wages

Determining Qualified Wages

Qualified wages are the compensation paid by employers to employees for the purposes of claiming the Employee Retention Credit. Understanding what constitutes qualified wages is essential, as it directly impacts the amount of credit an employer can claim. Qualified wages consist of:

  • Salary or hourly pay
  • Bonuses
  • Health insurance costs paid by the employer
  • Retirement benefits paid by the employer
  • Other taxable benefits provided to employees

It is important to note that qualified wages only apply to wages paid during periods of a significant decline in gross receipts or when the employer’s operations have been fully or partially suspended due to a government order related to COVID-19. Employers must be cautious when limiting commerce and claiming the credit to ensure they are in compliance with all applicable guidelines and regulations.

Wage Limitations

There are specific wage limitations set by the IRS to ensure employers do not overclaim the Employee Retention Credit. First, the credit can only be applied to wages of up to $10,000 per employee per year. This means that once an employee’s wages reach $10,000 in a calendar year, the employer cannot claim any additional credit for that employee. Additionally, the credit is limited to 50% of qualified wages paid during the eligible period in 2020 and 70% of qualified wages paid during the eligible period in 2021 through the Treasury and IRS guidance.

Employers should remain aware of these limitations when determining the maximum credit available to them. By understanding and applying these rules, employers can confidently and accurately claim the Employee Retention Credit during the eligible periods.

Calculating and Claiming the Credit

Calculating the Credit

The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continued to pay employees during the COVID-19 pandemic. It is available for wages paid from March 13, 2020, to December 31, 2021, as part of the American Rescue Plan Act. To calculate the credit, employers should follow the guidelines provided in Notice 2021-23. The credit value varies depending on the quarter and eligibility requirements.

Claiming the Credit on Tax Returns

Employers can claim the Employee Retention Credit by reporting it on their employment tax return, using Form 941, Employer’s Quarterly Federal Tax Return. If an employer failed to claim the credit on their initial Form 941, they can still claim it by filing an adjusted return with Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.

For 2020 wages, the deadline for advance payment of the credit using Form 7200 was either February 1, 2021 or the date when the employer filed their Form 941 for the fourth quarter of 2020, whichever came first.

Employers should be aware that if they file Form 941-X to claim the ERC, they must reduce their deduction for wages by the amount of the credit for the same tax period. In such cases, it may be necessary to amend the income tax return (e.g., Forms 1040, 1065, 1120) to reflect the reduced deduction.

Under the American Rescue Plan Act, the Employee Retention Credit is also available for eligible employers for wages paid during the third and fourth quarters of 2021. The deadline for claiming the credit related to these quarters was September 30, 2021. Employers should consult Notice 2021-20 for detailed guidance on eligibility and credit calculation for the first quarter of 2021.

It’s essential to be accurate and punctual when filing these forms and claiming the Employee Retention Credit. Careful documentation and bookkeeping can help ensure that your business receives the credits it’s entitled to and remains in compliance with tax regulations.

Interaction with Other Relief Programs

Paycheck Protection Program

The Employee Retention Credit (ERC) and the Paycheck Protection Program (PPP) were both designed to support businesses during the COVID-19 pandemic. While initially, businesses could not claim both the ERC and PPP, this rule changed with the Economic Aid to Hard-Hit Small Businesses, Non-Profits, and Venues Act. Now, businesses can benefit from both programs, provided the same wages are not used for PPP forgiveness and ERC claims.

Shuttered Venue Grants

Under the Shuttered Venue Grants program, eligible entities such as live venue operators, movie theaters, and museums could receive financial support. The American Rescue Plan Act allowed businesses to claim both the ERC and Shuttered Venue Grants but with a caveat: a business cannot use funds from both programs for the same expenses. To maximize the benefits, businesses should carefully allocate and document expenses when participating in these programs.

Restaurant Revitalization Grants

Similar to the interaction between ERC and the other relief programs, the Restaurant Revitalization Grants can be used alongside the ERC. However, expenses eligible for the ERC cannot be covered by the restaurant grant. Business owners should maintain clear records of their spending to prevent any overlap.

In conclusion, the availability of assistance through multiple relief programs offers flexibility and support to businesses affected by the pandemic. By understanding the eligibility criteria, restrictions, and interaction of these programs, businesses can optimize the benefits available to them.

Important Deadlines and Dates

ERC Deadlines

The Employee Retention Credit (ERC) is a refundable tax credit available for businesses that continued to pay employees during the COVID-19 pandemic when either shut down or experiencing significant declines in gross receipts. The ERC was initially introduced covering the period between March 13, 2020, and December 31, 2021 (source). However, it has gone through multiple extensions, with significant enhancements taking effect from January 1, 2021, through June 30, 2021 (source).

Under the American Rescue Plan Act (ARPA), the Employee Retention Tax Credit was further extended through December 31, 2021 (source). During the first two calendar quarters of 2021, the maximum ERC available was $7,000 per employee per calendar quarter, totaling $14,000 for these quarters (source).

Notable Dates

  • March 13, 2020: The ERC was introduced for businesses affected by the COVID-19 pandemic from this date.
  • December 31, 2021: The original end date for the ERC, was later extended.
  • January 1, 2021: Enhancements to the ERC took effect and applied till June 30, 2021.
  • June 30, 2021: The ERC was extended to cover the entire 2021 calendar year under ARPA.

Employers can benefit from the Employee Retention Credit by reducing their employment tax deposits and claiming the credit on their employment tax returns (source). The Internal Revenue Service provides detailed guidance on claiming the credit, eligibility and calculating the credit amount.

Resources and Additional Information

Official Guidance and Notices

The Internal Revenue Service (IRS) provides comprehensive guidance on the Employee Retention Credit (ERC) for businesses affected by the COVID-19 pandemic. This resource offers valuable information on eligibility, credit calculations, and the process of claiming the ERC.

Of particular importance are IRS Notices 2021-49 and 2021-23. Notice 2021-49 provides additional guidelines for employers claiming the ERC after June 30, 2021, and before January 1, 2022, as well as miscellaneous issues that apply to both 2020 and 2021. You can find more details on this notice in the official IRS news release.

Notice 2021-23 offers guidelines for employers claiming the ERC for the first two quarters of 2021. This notice is covered in the IRS news update from April 2021, which highlights key aspects and modifications to the ERC under the CARES Act and the Relief Act.

Tax Professionals and Assistance

For taxpayers who require additional assistance, the Frequently Asked Questions (FAQ) page on the IRS website offers clarification on common concerns related to the Employee Retention Credit. The FAQs provide valuable information, such as income tax return amendment requirements when claiming the ERC through Form 941-X.

Additionally, taxpayers are advised to consult with tax professionals or seek assistance from qualified experts to ensure compliance with the ERC requirements. Tax professionals can guide businesses through the process of calculating and claiming the credit, helping them maximize their benefits while minimizing potential mistakes.

Potential Pitfalls and Scams

Aggressive ERC Marketing

One concern surrounding the Employee Retention Credit (ERC) relates to aggressive marketing tactics used by some promoters. These promoters often target businesses that might not qualify for the credit, and encourage them to claim it improperly. The IRS has issued a warning urging taxpayers to carefully review the ERC guidelines to avoid being misled by these tactics.

Aggressive marketing ploys may include:

  • Direct mailing from non-existent groups, such as the “Department of Employee Retention Credit”
  • Creating letters that look like official IRS correspondence or government mailings
  • Urging immediate action without providing all the necessary details

Fraudulent Claims and Scams

The popularity of the ERC, which aims to support businesses affected by the COVID-19 pandemic, has also opened the door for fraudulent claims and scams. These can have serious consequences for businesses that unknowingly participate in such activities. The IRS has published warning signs of potential ERC scams, which include:

  • Communications from individuals claiming to be IRS representatives
  • Requests for personal or financial information, often via email or phone

To avoid falling victim to these scams and other pitfalls, businesses should consult with a qualified tax professional when applying for the ERC. This ensures that claims are properly filed and in accordance with the guidelines laid out by the IRS.

Frequently Asked Questions

What is the final date to claim the Employee Retention Credit for 2021?

The final date to claim the Employee Retention Credit (ERC) for 2021 was December 31, 2021. The credit was available for businesses that continued to pay employees while either shut down due to the COVID-19 pandemic or had significant declines in gross receipts during this period. For more information, you can refer to the Internal Revenue Service’s (IRS) page on the ERC.

How to calculate the 2021 Employee Retention Credit?

Calculating the 2021 Employee Retention Credit involves determining the qualifying wages paid to employees during the eligible time frame and then applying the appropriate credit percentage. The maximum credit amount for 2021 was 70% of qualifying wages, up to $10,000 per employee per quarter. Additional guidance on calculating the ERC can be found on the IRS’s website.

What are the 2021 changes impacting the Employee Retention Credit?

In 2021, several changes impacted the ERC, including an increase in the credit percentage from 50% to 70% on qualifying wages, an increase in the maximum credit amount per employee per quarter, and modifications to the eligibility criteria. More details on these changes can be found here.

How does the Employee Retention Tax Credit work?

The Employee Retention Tax Credit is a refundable credit businesses can claim on their federal employment tax returns. It is designed to encourage businesses to retain employees during challenging economic times, such as those caused by the COVID-19 pandemic. Employers can claim the credit for eligible wages paid to employees during the specified time frame. More information on how the ERC works can be found on the IRS’s ERC page.

How can a business apply for the Employee Retention Credit?

A business can apply for the Employee Retention Credit by reporting the qualified wages and the related health insurance costs on their federal employment tax return, typically using Form 941, Employer’s Quarterly Federal Tax Return. Detailed instructions on how to apply for the ERC can be found on the IRS’s website.

What are the qualification criteria for the 2022 Employee Retention Credit?

As of now, the Employee Retention Credit is not available for 2022 since the program officially concluded on December 31, 2021. You can find more information about the program’s end on the IRS’s Frequently Asked Questions page.

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