Employee Retention Credit

employee retention credit

Employee Retention Credit

You’re navigating tough times, keeping your business afloat.

Ever heard of the Employee Retention Credit? It’s not a loan, but a refundable tax credit aiding businesses like yours to retain staff. It’s applicable to wages, even certain health insurance costs.

Updated frequently, you’ve got to keep abreast of changes. You can apply retroactively too.

Let’s delve into the ERC, understanding how it can bolster your business and support your employees.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a tax credit that can be refunded, which you, as a business owner, can avail of based on qualified wages disbursed to your workforce. Its purpose is to incentivize you to retain your employees even when your business faces challenging circumstances.

Understanding the specific changes in the ERC under different laws can help you maximize this benefit for your business.

CARES Act of 2020 and ERC

Under the CARES Act of 2020, you could’ve claimed an Employee Retention Credit against 50% of qualified wages paid to your employees. This refundable tax credit was designed to help businesses, including tax-exempt organizations, keep workers on their payroll during the pandemic.

Here are the main points to remember:

  • Your business or organization must’ve been operating during 2020
  • The credit was applicable for wages paid from March 13 to Dec. 31, 2020
  • The maximum credit was $10,000 per employee annually
  • The credit helped offset the employer’s portion of Social Security tax
  • It’s not a loan, so there’s no need to repay it

Understanding these details can help you navigate the complex world of tax credits and leverage them for your business.

Consolidated Appropriations Act of 2021 and ERC

With the passing of the Consolidated Appropriations Act in 2021, you’re now able to claim a larger percentage of qualified wages paid to your workforce. Specifically, the Act expands eligibility to include PPP recipients, colleges, universities providing medical care, and 501(c)(1) organizations.

The credit has increased to 70% of qualified wages, up from the previous 50% under the CARES Act of 2020. Additionally, the cap on wages that qualify for the credit has been raised to $10,000 per employee per quarter. This allows for a potentially significant boost to your bottom line.

However, it’s crucial that you understand and adhere to the specific eligibility criteria and calculation rules to ensure you’re fully leveraging this opportunity. Remember, the ERC isn’t a loan and doesn’t need to be repaid.

American Rescue Plan Act of 2021 and ERC

Following the changes made by the American Rescue Plan Act in 2021, you’re now able to extend your claim for certain wages into the first three quarters of 2021, providing further financial relief for your business. This welcomed adjustment enables you to claim up to 70% of qualified wages, with a $10,000 limit per quarter, translating to a maximum of $7,000 per employee per quarter.

However, specifics are important:

  • The Infrastructure Investment and Jobs Act altered the program’s end date for most businesses.
  • Recovery Startup Businesses remained eligible until the end of 2021.
  • These businesses could claim up to $50,000 for Q3 and Q4 of 2021.
  • The American Rescue Plan Act broadened the scope of claimable wages.
  • It’s crucial to stay updated with changes to maximize benefits.

How Does the Employee Retention Credit Work?

You’ll find that the Employee Retention Credit (ERC) works as a refundable tax credit based on the payroll taxes your business has paid. It was designed to help businesses affected by the COVID-19 pandemic, with the goal of encouraging employee retention. It’s important to remember that the ERC isn’t a loan and doesn’t need to be repaid.

The American Rescue Plan Act implemented some changes, shifting the nonrefundable pieces of the ERC to be claimed against Medicare taxes instead of Social Security taxes. This change applies to wages paid after June 30, 2021 and doesn’t affect the total credit amount. If the credit exceeds the employer’s total liability of the portion of Social Security or Medicare in any calendar quarter, the excess is refunded to you.

Eligibility for the ERC has been expanded and amended over time. Originally, it covered businesses, tax-exempt organizations, and certain entities. The Consolidated Appropriations Act of 2021 extended eligibility to include recipients of Paycheck Protection Program loans, colleges and universities providing medical care, and 501(c)(1) organizations.

The credit can be claimed on qualified wages paid to employees. The rate has changed, initially set at 50% of qualified wages and later increased to 70%. The maximum credit per employee also varies, initially set annually but moved to a quarterly basis in 2021.

To claim the ERC, you’ll reconcile the amounts on your Form 941 at the end of each quarter. Remember, the ERC has a lookback period, so you may be able to apply retroactively.

Employee Retention Credit Eligibility: Who Can Claim?

As you navigate through the complexities of the Employee Retention Credit (ERC), it’s crucial to understand its eligibility criteria. Knowing who can claim this credit will help you make the most of this financial relief measure.

Let’s delve into the specifics of the ERC eligibility, focusing on:

  • Business suspension
  • Decline in gross receipts
  • Recovery startup businesses.

A business enterprise that experienced a complete or partial cessation of operations or had to reduce its operating hours as a result of a government directive.

If your business experienced a complete or partial cessation or had to decrease operating hours because of a government directive, you’re likely eligible for the Employee Retention Credit. This applies only for the portion of the quarter your business was impacted, not the entire quarter.

However, certain businesses may not qualify:

  • Essential businesses, unless their supply of critical materials or goods was disrupted in a way that affected their operations.
  • Businesses that were closed but could continue operations virtually via telework.
  • Businesses that didn’t see a significant decline in gross receipts during the suspension period.

Despite these restrictions, your business may still qualify under the second factor test. Consult a professional to understand your eligibility better.

An employer that has a significant decline in gross receipts.

Should your business experience a significant drop in gross receipts, it’s possible that you’re eligible for this beneficial tax credit. The Employee Retention Credit (ERC) was designed to support businesses like yours that have seen financial impacts due to the pandemic.

Under the CARES Act of 2020, if your gross receipts in any calendar quarter were below 50% of those in the same quarter in 2019, you’d qualify. However, this eligibility ends in the quarter following one where your gross receipts exceed 80% compared to 2019.

In 2021, the Consolidated Appropriations Act revised this threshold. Now, if your business has seen over a 20% drop in gross receipts compared to 2019, you may be eligible for the ERC.

Recovery Startup Business

You’re considered a Recovery Startup Business if you started your trade or business after Feb. 15, 2020, and your annual gross receipts don’t exceed $1 million. This classification, introduced in the American Rescue Plan Act – 2021, allows you to be eligible for the Employee Retention Credit (ERC) under certain conditions.

Here’s what you need to know:

  • Recovery Startup Businesses can claim up to $50,000 per quarter in 2021.
  • You aren’t required to meet the previous eligibility conditions of cessation of business operations or decrease in total revenue.
  • All qualified employee wages can be used for the credit, regardless of employee numbers.
  • Assessment for this category is carried out each quarter.
  • ERC Specialists can assist you in determining your eligibility and claiming the credit.

Are Tipped Wages Incorporated in Eligible Payroll?

In assessing whether tipped wages are included in qualified wages, it’s crucial to understand IRS guidelines.

If your employees’ tips exceed $20 in a calendar month, these tips count towards qualified wages.

However, if tips fall below this threshold, they’re not considered FICA wages and won’t qualify for the retention credit.

When Will Eligible Businesses Begin Receiving an ERC Refund?

Generally, it’s been taking about six months to see your ERC refund, but if it’s a larger amount, expect some additional review time by IRS auditors. This duration is a rough estimate and may vary based on the complexity of your case and the IRS’s current workload. As the IRS reviews your submission, they may have additional queries or require further documentation, which could extend this timeframe.

The Employee Retention Credit (ERC) is a refundable tax credit aimed at supporting businesses that have been financially impacted by COVID-19, and it’s calculated on the wages paid to employees. The IRS takes the task of verifying the legitimacy and accuracy of these claims seriously. Therefore, if your refund is substantial, it’s likely to draw more attention and a more in-depth review from IRS auditors. This scrutiny helps ensure that the funds are going to qualifying businesses and are being used appropriately.

While ERC Specialists can guide you through the process and assist with amending your tax returns, the IRS is the final arbiter, dictating when and if you receive the refund. If there are any discrepancies, errors, or missing documents in your amendment, it could delay the refund further. Therefore, it’s crucial that you provide all necessary information accurately and promptly to expedite the review process.


So, that’s the lowdown on the Employee Retention Credit. It’s a powerful tool to support your business and retain your valuable employees during tough economic times.

Remember, eligibility rules and benefits have changed over time, so stay updated. Don’t leave money on the table – you can even apply retroactively.

Use this knowledge to your advantage and leverage the ERC to keep your business thriving. It’s your right as a business owner, so make the most of it.

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