Employee Retention Credit (ERC): A FREE Comprehensive Guide

In response to the economic impacts of the COVID-19 pandemic, the US government passed several relief measures, including the Employee Retention Credit (ERC). This credit is designed to encourage businesses to retain their employees during difficult times. In this comprehensive guide, we will cover everything you need to know about the ERC, including eligibility requirements, credit calculations, and other important details.

What is the Employee Retention Credit (ERC)?

The Employee Retention Credit is a refundable tax credit available to eligible employers who retained their employees during a qualifying period of time. This credit is designed to offset the costs of keeping employees on payroll and can be used to reduce an employer’s share of social security taxes. The ERC is available to businesses of all sizes, including non-profits, but is subject to certain eligibility requirements.

The Employee Retention Credit (ERC) was developed to encourage and support employers who retained existing employees throughout 2020 and for the first three quarters of 2021 by offering a generous payroll tax refund through the IRS.

Eligible businesses can receive a refund of up to $5,000 per employee for all of 2020 and up to $7,000 per employee kept on the payroll for each quarter for Q1 through Q3 of 2021. That’s a total refund of up to $26,000 per employee kept on your payroll.

Eligibility for the Employee Retention Credit

To be eligible for the ERC, a business must meet the following criteria:

Business operations affected by COVID-19: The business must have experienced a significant decline in gross receipts during a qualifying quarter in 2020 or 2021. Alternatively, the business must have been fully or partially suspended due to government orders related to COVID-19.
Employer size: Employers with 500 or fewer employees are generally eligible for the ERC. However, for 2021, employers with up to 1,500 employees may be eligible if they experienced a significant decline in gross receipts.
Qualified wages: The ERC is based on “qualified wages,” which are wages paid to employees during the qualifying period. For 2020, qualified wages are wages paid between March 13, 2020, and December 31, 2020. For 2021, qualified wages are wages paid between January 1, 2021, and December 31, 2021.
Not double-dipping: Employers cannot claim the ERC for the same wages used to claim other COVID-19 relief measures, such as the Paycheck Protection Program (PPP).

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How to Calculate the Employee Retention Credit

The ERC is equal to 50% of qualified wages paid to eligible employees, up to a maximum credit of $5,000 per employee for 2020 and $7,000 per employee per quarter for 2021. For example, if an eligible employer paid $20,000 in qualified wages to an employee during a qualifying quarter in 2021, they could claim a credit of $7,000 for that employee for that quarter.

Other Important Details about the Employee Retention Credit

Claiming the credit: Eligible employers can claim the ERC on their employment tax returns, using Form 941. If the credit exceeds the employer’s share of social security taxes, the excess credit is refundable.
Advance payment: For 2021, eligible employers can request an advance payment of the ERC, based on the estimated amount of the credit. The advance payment is claimed on Form 7200.
Interaction with other relief measures: As mentioned earlier, employers cannot claim the ERC for the same wages used to claim other COVID-19 relief measures. Additionally, if an employer claimed the ERC in 2020, they may be eligible for an increased ERC in 2021.