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A Short Guide to: ERC – Employee Retention Credit

The Employee Retention Credit (ERC) is a tax credit designed to help businesses keep their employees on payroll during challenging economic times. The credit was initially introduced in the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, and has been extended and expanded under subsequent legislation. In this article, we’ll take a closer look at the ERC and how it can benefit businesses and their employees.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit that can be claimed by eligible employers who have experienced a significant decline in gross receipts or have been partially or fully suspended due to a government order related to COVID-19. The credit is equal to 70% of qualified wages paid to employees, up to a maximum of $10,000 per employee per quarter, for wages paid between March 13, 2020, and December 31, 2021.

Eligible employers include businesses of all sizes, including tax-exempt organizations, but certain governmental entities are not eligible. Additionally, the credit is not available to businesses that received a Paycheck Protection Program (PPP) loan, but those who have received a PPP loan may still qualify for the credit for wages that were not paid for with the loan proceeds.

How does the ERC work?

To claim the ERC, eligible employers must report the qualified wages and the amount of the credit claimed on their quarterly employment tax returns, which are Form 941 for most employers. The credit is then applied against the employer’s portion of Social Security taxes for that quarter. If the credit exceeds the employer’s Social Security tax liability, the excess is refundable.

For example, if an eligible employer paid $20,000 in qualified wages to an employee during the second quarter of 2021, the employer could claim a credit of $14,000 (70% of $20,000) on its Form 941 for that quarter. If the employer’s Social Security tax liability for that quarter was only $12,000, the excess credit of $2,000 would be refunded to the employer.

What are qualified wages?

Qualified wages are wages paid to employees during the period of time that the employer qualifies for the credit. The amount of qualified wages that can be claimed for the credit depends on the size of the employer.

For employers with 500 or fewer full-time employees, all wages paid to employees during the period of time that the employer qualifies for the credit are qualified wages, regardless of whether the employee is providing services or not. For employers with more than 500 full-time employees, qualified wages are limited to wages paid to employees who are not providing services due to a full or partial suspension of the employer’s operations or a significant decline in gross receipts.

What are the benefits of the ERC?

The Employee Retention Credit can provide significant financial relief to eligible employers during challenging economic times. By providing a refundable tax credit for qualified wages paid to employees, the ERC can help businesses keep their employees on payroll and avoid layoffs or furloughs.

In addition to helping employers, the ERC can also benefit employees by providing job security and continued access to health insurance and other benefits. When businesses are forced to lay off or furlough employees, those employees may struggle to make ends meet and may lose access to important benefits like health insurance

The ERC can also help to stimulate the economy by providing financial support to businesses that are struggling to stay afloat. When businesses are able to keep their employees on payroll, those employees can continue to spend money in their local communities, supporting local businesses and helping to keep the economy moving.

Conclusion

The Employee Retention Credit is a valuable tool for businesses that have been impacted by the COVID-19 pandemic. By providing a refundable tax credit for qualified wages paid to employees, the ERC can help businesses keep their employees on payroll and avoid layoffs or furloughs. This can help to provide job security and continued access to benefits for employees, while also stimulating the economy.

It’s important for businesses to understand the eligibility requirements and how to claim the credit in order to take advantage of this valuable resource. The IRS has provided detailed guidance on the ERC and how to claim it, and businesses should consult with their tax advisors to ensure that they are maximizing their eligibility and properly claiming the credit.

The ERC has been extended and expanded under various pieces of legislation, including the American Rescue Plan Act of 2021 and the Consolidated Appropriations Act of 2021. The credit is now available through December 31, 2021, and eligible employers can claim up to $28,000 per employee for the year.

Overall, the Employee Retention Credit is a powerful tool for businesses that are struggling due to the COVID-19 pandemic. By providing financial support to eligible employers, the ERC can help to keep employees on payroll, provide job security and benefits, and stimulate the economy. Businesses should take advantage of this valuable resource to help weather the current economic challenges and emerge stronger on the other side.