The Employee Retention Tax Credit is set to expire December 31, 2021. Here's what you need to know to take advantage while you can.

On March 11, 2021, the American Rescue Plan Act was signed into law, extending the Employee Retention Tax Credit (ERTC) through December 31, 2021. With Congress discussing possibly ending the ERTC even sooner, it's unlikely that the tax credit has any chance of being extended beyond 2021.

The good news is that it's not too late to take advantage of this tax credit for employers. Here's what you should know about the ERTC—and why it's important to act now.

If you filed for the ERTC before, things have changed

The value of the ERTC has increased. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 passed in December 2020, increased the value of the ERTC for wages paid from January 1, 2021 through June 30, 2021 from 50 percent to 70 percent of qualified wages and later extended to 12/31/21 through the American Rescue Plan Act. Eligible qualified wages were increased from $10,000 per year to $10,000 per quarter, raising the maximum credit per employee per quarter to $7,000, totaling $14,000 for wages paid between January and June 2021.

It's easier to qualify. Employers able to demonstrate revenue declines of 20 percent (formerly 50 percent) became eligible for the ERTC in 2021 under the Consolidated Appropriations Act (CAA). Eligibility was also expanded to public universities, hospitals and medical-care providers, and new employers not in existence in 2019. The provision limiting employers with more than 100 employees from taking the credit only for wages paid for which no services were provided was changed under the CAA, so that the requirement only applies to employers with 500+ employees for 2021.

PPP loan recipients are now eligible. Effective in 2021, and retroactive to March 12, 2020, any employer that received a PPP loan can ALSO qualify for the ERTC, though the employer cannot claim ERTC on any wages used in its PPP loan forgiveness calculation. The maximum credit remains $5,000 per employee for 2020 while other limits in effect in 2020 continue to apply. Qualifying employers who received PPP loans in 2020 can amend their federal employment tax returns to request refunds for the ERTC.

New businesses are now eligible. The American Rescue Plan Act passed in March 2021 extended the ERTC to new businesses, beginning after February 15, 2020, with average annual receipts of under $1,000,000. For such businesses, the amount of the credit may not exceed $50,000 per quarter.

There are added benefits for "severely distressed" employers. Employers that can demonstrate reductions in gross receipts of 90 percent or more, compared to the same calendar quarter in 2019, are permitted to take the ERTC for all wages paid to employees (up to the applicable limit), even if they have over 500 employees. Employers with over 500 employees can only take the ERTC for wages paid to employees for which an employee is not providing services (i.e., paid time off).

If you did NOT file in 2020, be prepared

The great news for qualified employers seeking to benefit from the ERTC is that it's even easier to qualify. The potential benefits are substantial, but with so many legislative changes, and ongoing guidance from the federal government, things can get complicated quickly.

While eligibility for the ERTC has been broadened, determining eligibility can be challenging for employers, even before considering the employees, hours, and wage-related data and documentation required to calculate credits for which they may be eligible.

The next challenge for employers is gathering and parsing through payroll data, combined with multiple layers of company and wage qualification criteria, to calculate the credit for which an employer may be eligible.

Because the required data flows through a variety of stakeholders, including HR, payroll, finance, and tax departments, sharing knowledge and supporting the process across departments is critical to help ensure that the right calculations are made without negatively impacting the employer's broader tax strategy.

Because much of the domain knowledge required to gather the right data may reside with a single process owner within any of these departments, at a time of high employment volatility, ADP recommends focusing on gathering the right data to determine eligibility and calculate the ERTC credit sooner rather than later.

Learn more and stay informed

Visit the ADP Employee Retention Tax Credit (ERTC) Rapid Response Center and the ADP Cares Act Tax Credit FAQ Resource Page

ADP continues to monitor and communicate legislative updates.

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