The Employee Retention Tax Credit (ERC) is a fairly new thing, as it has only been implemented since 2020 as part of the CARES Act. It is a refundable tax credit meant to incentivize employers to keep their employees on payroll during the pandemic. But since then, there have been updates made regarding the ERC updates. And here’s what you need to know.
What Is ERC?
Basically, the ERC gives businesses that have fewer than 200 employees the ability to obtain a tax credit of up to $10,000 for each employee. The amount a business would receive would be based on the average salary of each worker during the tax year in question.
The money is meant to incentivize businesses to keep their employees on payroll during the pandemic. If a business has fewer than 50 employees, the business is eligible for a tax credit of up to $5,000 for each employee.
Benefits of ERC
ERC is meant to be used by businesses to help keep their employees on payroll during the pre-pandemic time. Being able to prove to employees that they can have a job, at least during the pandemic, can give businesses a competitive edge in keeping their workers. But this tax credit is unique in that it can be used by businesses that don’t usually offer any sort of benefits to their employees (comparable to the tax credits given to businesses offering health insurance to their workers).
Limitations of ERC
It is limited to businesses that have fewer than 200 employees.
Only one employee needs to have been hired by the end of year one, to be eligible for the tax credit.
The ERC is only good for the first year of the tax year.
What the Updates Bring to the Table
The first update that was made to ERC is that the tax credit was made refundable for businesses that were previously ineligible for ERC. In other words, businesses that had less than $10,000 in tax liability are now able to claim the entirety of their ERC refund regardless of the amount of their tax liability. In this situation, the business would receive a rebate check from the IRS.
Secondly, the updates changed the way that businesses that have more than 200 employees and less than 500 employees can claim their ERC refund. Previously, these businesses were capped at a $3,000 credit per employee. The updates allow these businesses to claim the entire credit for their ERC refund regardless of how many employees they have.
The final change made to the ERC is that businesses that have more than 500 employees were previously capped at a $7,000 credit per employee. This update allows businesses with 500 or more employees to now claim the full credit for their ERC refund as well.
Final Thoughts
These updates illustrate a lot of changes that could come to the ERC in the future. But one thing is clear: the ERC is still a fairly new thing. And it is not yet clear how much it will impact businesses during the pandemic. That being said, it’s best to keep an eye out for further updates regarding ERC in the future.
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