Employee Retention Credit (ERC) Explained

The Employee Retention Credit (ERC) is a valuable financial resource for businesses navigating the challenges brought on by the COVID-19 pandemic. As a refundable tax credit, the ERC was established to incentivize businesses to continue paying their employees during challenging economic times, such as periods of significant declines in gross receipts or mandatory shutdowns.

As an employer, understanding the ERC’s benefits and eligibility requirements can be crucial for sustaining and supporting your workforce. Originally introduced through the CARES Act in March 2020 and extended until December 31, 2021, the credit applies to up to 50% of an eligible employee’s wages, with a maximum of $10,000 in wages per employee. This means that your business could potentially claim a tax credit of up to $5,000 per employee.

To make the most of the Employee Retention Credit, it’s essential to familiarize yourself with its stipulations and ensure your business meets eligibility requirements. This not only supports your business operations financially but also helps maintain a positive relationship with your employees during these uncertain times.

The information in this article is not tax, financial, accounting or investment advice. You should consult with a licensed professional for advice concerning your specific business.

September 2023 Update

On Thursday, September 14, 2023 CNBC reported that IRS Commissioner Danny Werfel ordered the agency to immediately stop processing new claims for the employee retention credit. The pause is to last until at least the end of 2023.

In his remarks made on a press call, Werfel stated that the effort was to protect filers from a “surge of questionable claims.”

He went on to say that “The IRS is increasingly alarmed about honest small business owners being scammed by unscrupulous actors, and we could no longer tolerate growing evidence of questionable claims pouring in.”

The unscrupulous promoters have been “taking a big chunk of their refund” as part of their services.

So with that said, be careful if you are contacted by someone trying to help you claim a refund.

What is the Employee Retention Tax Credit?

The Employee Retention Tax Credit (ERC) is a refundable tax credit designed to help businesses keep their employees on payroll during challenging economic times brought on by the COVID-19 pandemic.

This credit applies to businesses that either had to shut down or experienced significant declines in gross receipts from March 13, 2020, to December 31, 2021.

As an eligible employer, you can receive a tax credit against certain employment taxes. Since the credit is refundable, you may even receive payment for the portion of the credit that exceeds your due employment taxes.

The ERC was created to support businesses in maintaining their workforce and lessen the financial burden caused by the pandemic.

To qualify for this credit, your business must have been fully or partially suspended due to COVID-19 or have experienced a decline of more than 50% in gross receipts. The amount of the credit you can receive is 50% of up to $10,000 in wages paid per employee.

Keep in mind that further guidance on the Employee Retention Credit available under the American Rescue Plan Act of 2021 was provided for wages paid during the third and fourth quarters of 2021.

Stay up to date with the Department of the Treasury and the Internal Revenue Service (IRS) for any relevant changes and information.

How Does Employee Retention Credit Work?

The Employee Retention Credit (ERC) is a refundable tax credit designed to support businesses that continued to pay employees during the COVID-19 pandemic. If your business was shut down or experienced significant declines in gross receipts, you might be eligible for this credit.

When calculating the ERC, you can receive a credit of 50% of up to $10,000 in wages paid to employees. The credit applies to wages paid during periods when your business is fully or partially suspended due to COVID-19 or when your gross receipts decline by more than 50%.

To claim the ERC, you will report the credit on your quarterly employment tax return using Form 941, Employer’s Quarterly Federal Tax Return. If the credit amount exceeds the employment taxes you owe, the difference will be refunded to you.

Remember that to qualify for the ERC, you must be an eligible employer. Eligible employers include businesses, tax-exempt organizations, and self-employed individuals that meet certain requirements related to business suspension or reduction in gross receipts.

Who Qualifies for the Employee Retention Credit?

To qualify for the Employee Retention Credit (ERC), you need to be an eligible employer. Eligible employers are businesses and tax-exempt organizations that meet specific criteria during the COVID-19 pandemic. These criteria include:

• Your business operations are fully or partially suspended due to government orders related to COVID-19.
• You experienced a significant decline in gross receipts compared to the same quarter in the prior year. For the year 2020, this is defined as a more than 50% decline.

For wages paid after March 12, 2020, and before January 1, 2021, the ERC was equal to 50% of up to $10,000 in qualified wages (including qualified health plan expenses). This credit applied to employers whose business was fully or partially suspended because of COVID-19 or whose gross receipts had declined by more than 50% compared to the same quarter in the previous year.

Under the American Rescue Plan Act enacted on March 11, 2021, the ERC was extended and made available for eligible employers who paid wages during the third and fourth quarters of 2021.

If your business is a recovery startup, you may still claim the ERC for wages paid after June 30, 2021, and before January 1, 2022. A recovery startup business, as defined for the purpose of the ERC, is a business that started after February 15, 2020, and meets certain revenue criteria.

To claim the ERC, you must file an original or adjusted employment tax return for the period within the specified dates. Ensure you meet the requirements set forth for eligible employers and take advantage of this credit if you qualify.

What is the Deadline for the Employee Retention Credit?

There are two deadlines you need to remember:

• For all quarters in 2020, the deadline is April 15, 2024.
• For all quarters in 2021, the deadline is April 15, 2025.

These deadlines ensure that you can claim the ERC for eligible wages paid in the respective years. To apply for the ERC, you will need to file an IRS Form 941-X, “Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.”

The ERC is available to eligible employers for wages paid during the third and fourth quarters of 2021. Under the American Rescue Plan Act of 2021, enacted on March 11, 2021, the credit has been extended for small businesses through December 2021. These businesses can offset their current payroll tax liabilities by up to $7,000 per employee per quarter, amounting to a credit of up to $28,000 per employee for 2021.

To take advantage of the Employee Retention Credit, ensure you meet the eligibility criteria and submit your application before the appropriate deadlines.

Is the Employee Retention Credit Considered Taxable Income?

The Employee Retention Credit is not considered taxable income. This is because it falls under the category of a refundable tax credit, which is designed to offset employers’ payroll costs and eligible wages. In essence, it positively impacts your business without increasing your tax liability.

When it comes to reporting the ERC, as an eligible employer, you will need to report your total qualified wages and the related health insurance costs for each quarter on your employment tax returns.

This is typically done using Form 941, Employer’s Quarterly Federal Tax Return, for the relevant periods. It’s essential to maintain accurate records and adhere to reporting requirements to ensure a smooth filing process.

Can I Claim Both the Employee Retention Credit and PPP?

Yes, you can claim both the Employee Retention Credit (ERC) and a Paycheck Protection Program (PPP) loan. The Relief Act, which made significant changes for 2020, allows eligible employers who received a PPP loan to also claim the ERC. However, it is important to note that the same wages cannot be counted both for seeking forgiveness of the PPP loan and calculating the employee retention credit.

To ensure compliance with these guidelines, evaluate your eligibility for the employee retention credit before filing your PPP loan forgiveness application. When considering wages for the ERC, remember that any wages reported as payroll costs for PPP loan forgiveness or certain other tax credits cannot be claimed for the ERC in any tax period.

The Internal Revenue Service (IRS) has issued specific guidance for employers claiming the Employee Retention Credit against payroll tax for 2020 through Notice 2021-20. This guidance does not address changes made to the ERC for qualified wages paid after Dec. 31, 2020, but the IRS will address 2021 credits in future guidance.

What Can I Spend the Employee Retention Credit On?

You can utilize the ERC for specific expenses related to your employees.

Primarily, you can spend the Employee Retention Credit on qualified wages paid to your employees. These wages include payments made after March 12, 2020, and before January 1, 2021. Ensure that you adhere to the guidelines stating that the ERC is equal to 50% of up to $10,000 in qualified wages, including qualified health plan expenses.

In addition to wages, you can also allocate the Employee Retention Credit funds towards certain health insurance costs for your employees. This can be part of a greater effort to create an employee recognition program focused on encouraging engagement and helping your employees feel valued.

Keep in mind that the eligibility and calculation of the Employee Retention Credit depend on the number of employees your business had in 2019. For employers with 100 or fewer employees in 2019, the credit is based on wages paid to all employees, whether they worked or not. Make sure you do not exceed the limits set forth by the Internal Revenue Service when spending the Employee Retention Credit on employee-related costs.

Can I Still Claim the Employee Retention Credit?

Yes, you can still claim the Employee Retention Credit (ERC) if you are an eligible employer.

To apply for the ERC, you should complete and file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, with your quarterly federal tax return. It’s important to prepare and submit this form accurately to claim the credit and avoid potential issues.

The American Rescue Plan extended the availability of the Employee Retention Credit for small businesses through December 2021. As an eligible employer, you can offset your current payroll tax liabilities by up to $7,000 per employee per quarter. This credit of up to $28,000 per employee for 2021 is available to small businesses that have seen their revenues decline or been significantly impacted by the pandemic.

Does the Employee Retention Credit Have to Be Paid Back?

The Employee Retention Credit (ERC) is a refundable tax credit. This means that if the credit amount exceeds your tax liability, the excess will be refunded to you.

In this case, you do not have to pay back the Employee Retention Credit.

The ERC was designed to help you as an employer during difficult times, allowing you to continue paying your employees and keeping your business running. As long as you meet the eligibility requirements and comply with the IRS rules and regulations, the credit is yours to keep.

It’s important to accurately calculate and claim the ERC to avoid any potential issues with the IRS. Some key eligibility requirements for the ERC include:

• The organization must be carrying on a trade or business in 2020 or 2021.
• The business must have experienced either a full or partial suspension due to government orders or a significant decline in gross receipts.

Remember that if you received a Paycheck Protection Program (PPP) loan during the COVID-19 crisis, it’s still possible to apply for the Employee Retention Credit. However, specific guidelines might determine whether or not you qualify for the ERC.

For detailed guidance on the Employee Retention Credit, the American Rescue Plan Act, and any other related information, consult with a tax professional or refer to official IRS resources.

When Does the ERC End?

Initially, the ERC was available from March 13, 2020, through December 31, 2020. However, due to ongoing economic challenges, the availability of the ERC was extended. Under the American Rescue Plan Act of 2021, enacted on March 11, 2021, the Employee Retention Credit continued to be available for eligible employers for wages paid during the third and fourth quarters of 2021.

To take advantage of this credit, you as an employer must be mindful of the deadlines for claiming the ERC. As per the IRS guidance, employers who pay qualified wages after June 30, 2021, and before January 1, 2022, are still eligible to claim the credit. Make sure to familiarize yourself with the process and consult with your tax professional to ensure you’re maximizing the benefits from the ERC for your business.

Keep in mind that this credit is no longer available after December 31, 2021. It’s essential to stay updated on any changes or future extensions to ensure your business is prepared as the ERC program comes to its conclusion.

Employee Retention Credit (ERC) Overview

CARES Act and the ERC

In response to the COVID-19 pandemic, the Employee Retention Credit (ERC) was introduced as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. As a business owner, you can take advantage of the ERC, which is a refundable tax credit. The credit equals 50% of up to $10,000 in qualified wages paid to employees after March 12, 2020, and before January 1, 2021. This credit aims to incentivize employers like you to keep employees on your payroll during the challenges brought about by the pandemic.

Consolidated Appropriations Act

The ERC was then extended and modified by the Consolidated Appropriations Act in December 2020. Key changes you should be aware of include:

• The credit rate was increased from 50% to 70% of qualified wages.
• The maximum amount of credit you can claim per employee increased from $5,000 to $14,000.
• The threshold for significant declines in gross receipts dropped from 50% to 20%.

American Rescue Plan

The American Rescue Plan, enacted in March 2021, further extended the ERC through December 31, 2021. You should be aware that the credit amount and eligibility rules introduced by the Consolidated Appropriations Act apply for the entire 2021 period.

Infrastructure Investment and Jobs Act

Finally, the Infrastructure Investment and Jobs Act, signed into law in November 2021, included a provision that terminated the ERC for the fourth quarter of 2021. As a result, you should note that if your business was severely financially impacted, you are no longer eligible to claim the Employee Retention Credit for wages paid after September 30, 2021.

The Employee Retention Credit has gone through various legislative changes since it was first introduced. Familiarizing yourself with these changes can help you make informed decisions and take full advantage of the tax credit opportunities available to you during these challenging times.

Eligibility Requirements

Eligible Employers

To qualify for the Employee Retention Credit (ERC), you, as an employer, must meet one of the following criteria:

• Sustained a full or partial suspension of operations limiting commerce, travel, or group meetings due to COVID-19 and orders from an appropriate governmental authority
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021

Significant Decline in Gross Receipts

A significant decline in gross receipts occurs when your gross receipts in a calendar quarter are less than 50% of the gross receipts for the same calendar quarter in 2019. In the case of 2021, the decline threshold is 20% compared to the same quarter in 2019. Keep in mind that Notice 2021-20 and Notice 2021-49 offer further guidance on calculating gross receipts.

Recovery Startup Businesses

A recovery startup business can still claim the ERC for wages paid after June 30, 2021, and before January 1, 2022. To qualify as a recovery startup business, your business must:

• Have begun operations after February 15, 2020
• Have experienced average annual gross receipts of $1 million or less

Partial Suspension of Operations

A partial suspension of operations occurs when you, as an employer, are unable to carry on all or a significant portion of your business activities due to COVID-19-related governmental orders. This includes limitations on commerce, travel, or group meetings.

Eligible employers can claim up to 70% of qualified wages paid to employees after December 31, 2020, and before October 1, 2021. For 2021, the credit is equal to 70% of the first $10,000 in qualified wages per quarter, that is, up to $7,000 per employee per quarter.

Calculation and Benefits

Qualified Wages

To calculate the Employee Retention Credit, you need to first identify your qualified wages. Qualified wages are the wages you paid to your employees during a calendar quarter and it depends on the number of employees you had in 2019. If you had less than 100 employees in 2019, all the wages paid to your employees are considered qualified wages. If you had more than 100 employees, only the wages paid to employees not working during the pandemic will be considered as qualified wages.

Maximum Credit Cap

The maximum credit that you can claim through the Employee Retention Credit is capped at $7,000 per employee per quarter. To calculate your Employee Retention Credit, multiply 50% of the qualified employee wages paid in a calendar quarter, up to a maximum of $10,000 in wages per employee for the entire year. Here’s a simple example:

• Qualified Wages per Employee: $5,000
• Employee Retention Credit (50%): $2,500

This means that for an employee with $5,000 in qualified wages, you can claim a credit of $2,500.

Refundable Tax Credits

The Employee Retention Credit is a refundable payroll tax credit, which means that if the credit exceeds your payroll tax liabilities, you can receive a refund for the difference. For example, if your total payroll tax liability for a quarter is $8,000 and your calculated Employee Retention Credit is $10,000, you would receive a refund of the excess $2,000 instead of having it carry over to future payroll taxes owed.

Claiming the Employee Retention Credit

Form 941 and Form 941-X

To claim the Employee Retention Credit (ERC), you’ll need to fill out and submit Form 941, the Employer’s Quarterly Federal Tax Return. This form is used to report income tax, social security, and Medicare taxes withheld from employee wages. If you’ve already submitted Form 941 and realized that you didn’t claim the ERC, don’t worry. You can file an amended return using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. Always ensure that you file Form 941-X within the specified deadline to receive any eligible credit.

Form 7200 and Advance Payments

If you’re a qualifying employer and would like to receive an advance payment for the ERC, you can use Form 7200, Advance of Employer Credits Due to COVID-19. Complete this form and submit it to the IRS to receive advance payments for any qualifying tax credit.

Here’s a summary of the three forms used for claiming the Employee Retention Credit:

• Form 941: Employer’s Quarterly Federal Tax Return, used to report income tax, social security, and Medicare taxes withheld from employee wages.
• Form 941-X: Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, used to file an amended return if you’ve already submitted Form 941 but didn’t claim the ERC.
• Form 7200: Advance of Employer Credits Due to COVID-19, used to receive advance payments for qualifying tax credits, including the Employee Retention Credit.

Remember to always check the IRS guidelines and deadlines when filing these forms, and consult with a tax professional if you’re unsure about any aspect of the Employee Retention Credit application process.

Impact of PPP Loans and Other Relief Programs

Interaction with PPP Loan Forgiveness

The Paycheck Protection Program (PPP) and the Employee Retention Credit (ERC) are two key financial relief measures introduced by the U.S. government to help businesses navigate the economic challenges caused by the COVID-19 pandemic. A significant change in 2020 made by the Relief Act permits eligible employers that received a PPP loan to claim the employee retention credit. However, you should be aware that the same wages cannot be counted both for seeking forgiveness of the PPP loan and calculating the employee retention credit.

Family and Medical Leave Credits

Aside from the ERC, your business might also qualify for Family and Medical Leave Credits related to the Families First Coronavirus Response Act (FFCRA). These credits are designed to help businesses cover the cost of providing paid sick and family leave for reasons related to COVID-19. These credits are applicable for leave taken between April 1, 2020, and Sept. 30, 2021. Note that, unlike the ERC, these credits are separate from the PPP loan forgiveness, and claiming one does not affect the other.

Other Relief Measures

In addition to the PPP loan forgiveness and ERC, there are other relief measures that your business might qualify for, such as Shuttered Venue Operator Grants and Restaurant Revitalization Grants. When calculating a significant decline in gross receipts, you should be aware that COVID-19 relief amounts received from the government may not be included.

Be cautious about claiming multiple relief measures, as some might interact with each other, affecting their eligibility or the amount to be received. It’s essential to understand each program’s specific guidelines and limitations to maximize the benefits for your business.

Employer Considerations and Compliance

Medicare and FICA Taxes

When claiming the Employee Retention Credit, you should be aware of your obligations concerning Medicare and FICA taxes. While you can take advantage of the credit for up to 50% of the first $10,000 in qualified employee wages, you are still responsible for the employer’s share of Social Security and Medicare taxes on those wages. However, you can still claim the credit for the gross wages, excluding the withheld FICA taxes.

You must also continue to timely deposit your employment taxes and file an accurate employment tax return. To claim the employee retention credit, you can either report the credit on the employment tax return (e.g., Form 941, Employer’s Quarterly Federal Tax Return) or submit Form 7200, Advance Payment of Employer Credits Due to COVID-19, to request an advance payment.

Employee Health Insurance and Benefits

Your Employee Retention Credit claim also needs to consider the eligible health plan expenses. For eligible employers, the credit includes the cost of providing employee health insurance or other benefits. Make sure to calculate these costs and include them in your credit claim.

When determining qualified employee wages, do not double-count any amounts as both sick leave or family leave wages and Employee Retention Credit wages, as this may lead to errors and discrepancies on your tax filings.

Fraud and Misuse Prevention

To prevent fraud and misuse of the Employee Retention Credit, it’s crucial that you strictly follow the guidelines and criteria set forth by the IRS. Document all the governmental orders, if any, that impacted your business operations, as well as ensure the proper tracking and documentation of wages and hours associated with each employee during the impacted period.

It’s essential to accurately calculate and report your credit claim and be prepared to provide any necessary documentation to support your claim. Misreporting or providing false information can result in penalties and fines. Furthermore, collaboration with your tax advisor and payroll provider can reduce the risk of errors and ensure compliance with reporting requirements.

Frequently Asked Questions

The Future of the Employee Retention Credit (ERC)

Potential Changes and Extensions

As a business owner, you may wonder if there will be future changes to the Employee Retention Credit (ERC) program or if any extensions will be enacted. While the ERC was initially available from March 13, 2020, to December 31, 2021, it’s important to monitor information and updates from Congress regarding the program. Congress has the power to introduce legislation to extend or modify the ERC, so you should stay informed about any potential changes that may affect your business.

Future changes or extensions could further benefit business owners by providing additional credits or altering the qualifications. One possible scenario is the inclusion of the ERC in the proposed Infrastructure Investment and Jobs Act (IIJA), which may lead to revisions in the program guidelines. As a responsible business owner, it’s essential to remain updated on these potential developments.

Long-Term Effects on Businesses

The ERC has the potential to impact businesses positively in the long run. If employers qualify for the credit, they can receive up to $10,000 per employee retained. This financial assistance significantly reduces operating costs, allowing businesses to invest in other crucial aspects like infrastructure, technology, and growth.

By utilizing the ERC program, eligible businesses can potentially achieve significant savings on payroll expenses. For example, if you have 100 qualified employees, you could receive up to $1,000,000 in tax credits. These savings can be reinvested in your business, leading to long-term stability and growth.

Lastly, you should be aware of the impact of the ERC on your future tax obligations. The ERC is a refundable tax credit, which means it can affect your tax returns for April 15, 2024 or April 15, 2025. To fully leverage the ERC benefits, ensure to consult with a tax professional to navigate the compliance requirements and avoid any potential complications.

By staying informed on potential changes and understanding the long-term effects of the Employee Retention Credit, you can make informed decisions for your business that will enhance its overall financial health.