The Employee Retention Tax Credit: What it is, and How to Take Advantage
December 21, 2022
The Employee Retention Tax Credit, or ERC, is a refundable tax credit for employers who retain their employees during the COVID-19 pandemic shutdown. The credit was designed as an incentive to small businesses to keep their full-time employees on the payroll.
To claim the credit, business owners must have experienced either a full or partial suspension of operation due to a government order related to COVID-19, or a significant decline in gross receipts. If an employer meets either of these criteria, they are eligible for a tax credit of 50% of qualified wages paid to employees, up to $5,000 per employee, in order to pay for future payroll tax liabilities.
Get Funded Now
What is the Employee Retention Tax Credit?
The employee retention tax credit (ERTC) is a tax credit designed to help businesses and non-profits that have been affected by the COVID-19 pandemic retain their employees. The purpose of the credit is to provide financial support to businesses that have experienced a significant decline in revenue, allowing them to continue paying their employees and avoid layoffs.
The employee retention tax credit is a temporary measure that was introduced as part of the CARES Act, a package of economic relief measures enacted in response to the COVID-19 pandemic.
The credit is available to businesses that have experienced a decline in gross receipts of at least 50% compared to the same quarter in the prior year. Businesses that qualify for the credit can receive a credit of up to 50% of wages paid (including health plan expenses) to employees during the pandemic, up to a maximum credit of $5,000 per employee paid as Employer Credits for future tax liabilities.
The employee retention tax credit is available to businesses of all sizes, including sole proprietorships, partnerships, corporations, and tax-exempt organizations. It is also available to certain self-employed individuals. The credit is intended to help businesses that have been particularly hard-hit by the pandemic, such as those in the hospitality, leisure, and retail industries.
While the Employee Retention Tax Credit deals with wages paid to employees during the peak of the pandemic, you can still claim this credit by filing amended tax returns for the relevant quarters. You’ve got until 2024 to file amended returns for 2020, and until 2025 to file amended returns for 2021.
Where did this tax credit come from?
The employee retention tax credit was introduced as a tax relief arm of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was enacted in March 2020 in response to the COVID-19 pandemic. The CARES Act provided a wide range of economic relief measures, including the employee retention tax credit, which was designed to help businesses that have been affected by the pandemic retain their employees.
The employee retention tax credit was initially available for wages paid from March 13, 2020, through December 31, 2020. It was later extended through June 30, 2021, under the Consolidated Appropriations Act, 2021, which was enacted in December 2020.
The employee retention tax credit was further expanded and extended by the American Rescue Plan Act of 2021, which was enacted in March 2021. Under the American Rescue Plan Act, the employee retention tax credit was extended through December 31, 2021, and expanded to include businesses that have experienced a decline in gross receipts of at least 20% compared to the same quarter in the prior year. The credit was also expanded to include a credit of up to 80% of wages paid to employees during the pandemic, up to a maximum credit of $7,000 per employee.
Who’s eligible?
To qualify for the employee retention tax credit, a business must meet the following requirements:
The business must have experienced a decline in gross receipts. To qualify for the credit, a business must have experienced a decline in gross receipts of at least 50% in a calendar quarter compared to the same calendar quarter in the prior year. Alternatively, a business can qualify for the credit if it has experienced a decline in gross receipts of at least 20% in a calendar quarter compared to the same calendar quarter in the prior year and it has been fully or partially suspended by a government order due to the COVID-19 pandemic.
The business must have paid wages to employees. To qualify for the credit, a business must have paid wages to employees during the quarter in which it experienced the decline.
The business must have been providing services during the calendar quarter in which gross receipts went down. If no business operations occurred during the quarter in which the business experienced the loss in gross receipts, that company is not eligible for the credit.
Some exceptions and additional requirements may apply to certain businesses or types of wages. For example, businesses that are part of a controlled group or that have received a Paycheck Protection Program (PPP) loan may have additional requirements to meet to qualify for the employee retention tax credit. If you took a PPP loan, consult with a tax professional to determine if you’re eligible for an ERC.
How to calculate and claim the employee retention tax credit
Eligible employers can calculate the employee retention tax credit by following these steps:
Determine the eligible wages for the credit. Eligible wages are wages paid to employees during the quarter in which the business experienced the decline in gross receipts, up to a maximum of $10,000 per employee for the entire year.
Calculate the credit amount. As noted earlier, the credit amount is equal to 50% of the eligible wages paid to employees during the calendar quarter, up to a maximum credit of $5,000 per employee. For businesses that have experienced a decline in gross receipts of at least 20% in a calendar quarter and have been fully or partially suspended by a government order due to the COVID-19 pandemic, the credit amount is equal to 80% of the eligible wages paid to employees during the quarter, up to a maximum credit of $7,000 per employee.
Calculate the credit limit. The credit limit is the maximum amount of the employee retention tax credit that a business can claim in a taxable year. The credit limit is equal to the excess of the business’s employment tax liability for the taxable year over the sum of the credits for the taxable year that are allowable under other provisions of the Internal Revenue Code.
Calculate the creditable amount. The creditable amount is the lesser of the credit amount calculated in step 2 or the credit limit calculated in step 3. This is the amount of the employee retention tax credit that the business can claim.
It is important to note that the employee retention tax credit is a nonrefundable credit, which means that it can only be used to offset the business’s tax liability. If the creditable amount exceeds the business’s tax liability, the excess credit will not be refunded to the business.
Which forms do I need?
To calculate the employee retention tax credit, you will need to use the following forms from the IRS:
Form 941, Employer’s Quarterly Federal Tax Return: Form 941 is used to report wages paid to employees and employment taxes withheld from employees’ wages.
Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return: in order to amend a previous year’s Form 941 and claim a retroactive ERC.
Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees: Form 943 is used by agricultural employers to report wages paid to agricultural employees and employment taxes withheld from their wages. If your business is an agricultural employer, you will need to use Form 943 instead of Form 941.
Form 944, Employer’s Annual Federal Tax Return: Form 944 is used by small employers (those with an annual employment tax liability of $1,000 or less) to report wages paid to employees and employment taxes withheld from their wages.
Tips for maximizing the benefits of the employee retention tax credit
There are several strategies that businesses can use to maximize the benefits of the employee retention tax credit:
Maximize employee wages: The credit is calculated based on the wages paid to employees, so one way to maximize the credit is to pay as much in wages as possible.
Track and document employee retention efforts: To claim the employee retention tax credit, businesses must demonstrate that they have experienced a decline in gross receipts and that they have paid wages to employees during the quarter in which the decline occurred. It is important to track and document these efforts carefully to ensure that you have the necessary documentation to support your claim for the credit.
Consult with a tax professional: The employee retention tax credit is a complex tax credit with specific eligibility requirements and calculation methods. To ensure that you are maximizing the benefits of the credit and complying with all relevant tax laws, it is important to consult with a CPA or other tax professional who can help you navigate the IRS guidance associated with these credits.
