The CARES Act brought about many changes for businesses, including alterations to the way in which employees are paid and incentivized. While these new changes were primarily designed to help businesses stay afloat during the COVID-19 pandemic, they also have serious impacts on your bottom line if you operate as an employer. In this blog, we’ll describe that impact, and cover some new procedures you’ll need to follow for filing this year. 

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) was one of the several tax provisions enacted in the recently passed Protecting Americans from Tax Hikes Act (PATH), or as it’s more commonly known, the CARES Act. This provision helps employers offset the costs associated with retaining current employees—which means big news for small business owners. Through this refundable tax credit, eligible employers could recover 50 percent of up to $10,000 in wages paid to their employees after March 12, 2020, and before January 1, 2021. 


How did the Employee Retention Credit change in 2021?

The most significant change to the Employee Retention Credit came about last year, when changes were made to the definition of a key term of eligibility. Under the old system, employees needed to work at least 26 weeks within one year (12 weeks with the same employer) to qualify for this credit, but new tax laws have redefined employment to reflect what’s commonly referred to as 30-day services; if an employee works fewer than 30 days within one calendar year, they may not meet all requirements necessary for qualifying. Another change that would impact tax credits is employers can now offer more than one month of paid time off, up from just three days.

New Filing Procedures 

Following Notice 2021-49, tax filing procedures for tax returns that are able to qualify for employee retention credits for the 2021 tax year have changed. Contact us to discuss how this might benefit you. Specifically, we’ll discuss the Timing of Qualified Wages Deduction Disallowance and your options for filing:

Option 1: File the 2021 return that includes the ERC as is.

This means to go ahead and reduce qualified expenses for the ERC amounts for the 2021 tax return as we file, even though no ERC money has been received. Ideal prospects for this option include: 

  • businesses who have cash and their future 2022 operational cash flow would not be affected by increasing the 2021 tax caused by the credits; 
  • businesses who have a substantial net loss for 2021; and 
  • businesses who received minimal ERC amounts, that would have minimal impact or change to the 2021 net profit.  

Option 2: File the 2021 return without the ERC and amend once ERC money is received.

By doing this, you essentially treat the qualified expenses as if no ERC occurred for 2021, and once the ERC money is received, we will amend both the Company and personal returns as needed. Ideal prospects for this option include:

  • businesses that would have a substantial credit and the impact on recognizing the additional profit would be burdensome, and 
  • businesses that do not want to pay additional tax without the cash from the ERC.

If you’re unsure of how this tax change will affect you, or the effects that the different filing options may have for your business, please give us a call so that we can schedule a time to discuss all of the impacts and how you can best position yourself for future success.