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Modifications to the Employee Retention Credit (ERC) in the American Rescue Plan Act of 2021

The Employee Retention Credit (ERC) has been modified and extended by the American Rescue Plan Act, signed by President Biden on March 11th, 2021. Our team is here to help you determine whether claiming the credit would be beneficial.

The ERC was originally enacted in the CARES Act to encourage employers to hire and retain employees amidst the pandemic. Originally, the ERC applied to wages paid after March 11th, 2020 and before January 1st, 2021 but was later extended to wages paid before July 1st, 2021 by Congress. The American Plan Rescue Act extended and modified the credit to apply to wages paid after June 30th, 2021 and before January 1st, 2022. Therefore, eligible employers can claim the refundable credit against applicable employment taxes equal to 70% of the qualified wages paid to employees in Q3 and Q4 of 2021. Qualified wages are typically limited to $10,000 per employee per calendar quarter in 2021, making the maximum ERC available $7,000 per employee per calendar quarter in 2021, totaling $28,000 per employee.

Employers are qualified for the tax credit if they experienced a significant decline in gross receipts or a full/partial suspension of business due to a government order. If an employer has less than 500 employees, the credit can be claimed without regard to whether the employees for whom the credit is claimed actually performed services. However, employers with over 500 employees can only claim the credit for employers that do not perform services. Employers who received a PPP loan in 2021 are still eligible to claim the ERC. But, the same wages cannot be used for PPP loan forgiveness, fulfilling conditions of other COVID relief program, and in calculating ERC.

The following modifications will apply to the ERC beginning in Q3 of 2021:

  • Applicable employment taxes are the employer's share of Medicare taxes, equal to 1.45% of wages, and the amount of the tax under the Railroad Retirement Tax Act payroll tax that is attributable to the employer's tax rate.
  • Recovery startup businesses, which began operating after February 15th, 2020 and meet certain gross receipt requirements, are qualified employers. They will be eligible for an increased maximum credit of $50,000 per quarter, even if the business has not experienced a significant decline in gross receipts or been subject to a full or partial suspension under a government order.
  • Designated “severely financially distressed” employers will be able to treat all wages (up to $10,000) paid during quarters where they suffered a decline in gross receipts of 90% or more as compared to the same quarters in 2019 as qualified wages. This will allow employers with 500+ employees under financial distress to treat those wages as qualified wages, whether employees provided services or not.
  • The statute of limitations for assessments relating to the ERC will not expire until five years after the date that the original return claiming the credit is filed or treated as filed.

The Baldwin team is staying up-to-date on the latest legislation and updates as they happen, and we are committed to keeping you informed. If you have any questions or if you need assistance, do not hesitate to reach out.

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