Pay Attention to the Employee Retention Tax Credit in 2021

By this point, the 2021 tax filing deadline that occurred on May 17 is well behind us—but small business owners shouldn't put their taxes out of their minds just yet. The Employee Retention Credit (ERC) extends throughout the year to help give small business owners and companies a tax break.

Here's how the ERC works, and why you should use it in 2021.

The ERC came to fruition along with the CARES Act of March 2020 under the Trump administration. It was a way for the government to incentivize employee retention and dampen the rising unemployment rates that swept the nation.

Since then, the ERC has been extended through the end of 2021 and amended to allow businesses who received PPP (Paycheck Protection Program) loans to also claim this tax credit.

According to the IRS, the ERC is a "refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees." 

For 2021, eligible businesses can claim 70 percent of the first $10,000 of employee wages per quarter. Qualified wages, which include employer-paid health benefits, must occur between March 13, 2020, and December 31, 2021.

Not all businesses have access to the ERC tax credit, but many do. They must be private or tax-exempt in nature. There isn't a size limit, but small and big businesses must adhere to different regulations. The delineation for a small business is 500 employees or less. This is a big difference from last year's ERC, which defined small businesses as those having 100 employees or less. This amendment gives tax credits to more businesses. Note that employees must be full-time to count.

For example, large businesses can only count wages during times they were shut down, while small businesses can report qualified wages during times of operation, too.

To claim the credit, your business must have experienced a full or partial shutdown, a 50-percent drop in gross sales, or you're a startup that launched during economic recovery (after February 15, 2020). Startups that weren't in business in 2019 "can use the corresponding quarter in 2020 to measure the decline in their gross receipts" for 2021, according to the IRS.

Use IRS Form 7200 to get your advanced ERC payments. If you're looking for detailed instructions on how to fill out the form, the IRS has you covered.

Will the ERC extend beyond 2021? The jury is still out on that one. Either way, businesses should look beyond the ERC for other tax breaks and programs that can benefit them. For example, paid sick leave tax credits have been extended through September and the Restaurant Revitalization Fund might receive additional funding. These are just examples, but the point is to exhaust your options. What have you got to lose?