Employee Retention Credit

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) — also known as the Employee Retention Tax Credit (ERTC) — was a refundable tax credit incentivizing employers and tax-exempt organizations to keep full-time employees on their payrolls during the COVID-19 pandemic. It was introduced in 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and subsequently amended by the following acts:

• Consolidated Appropriations Act of 2021
• American Rescue Plan Act (ARPA)
• Infrastructure Investment and Jobs Act (IIJA)

Initially set active for wages paid between March 12, 2020, through Dec. 31, 2020, it was then extended through September 30, 2021, and eliminated for most businesses afterward. Eligible employers can still claim the credit, but the IRS has paused ERC processing in response to widespread scams capitalizing on this credit. When initially introduced, this tax credit was worth 50% of qualified employee wages but was limited to $10,000 for any one employee, granting a maximum credit of $5,000 for wages paid from March 13, 2020, to December 31, 2021. It has since been updated, increasing the percentage of qualified wages to 70% for 2021. The per-employee wage limit was increased from $10,000 per year to $10,000 per quarter.

The credit is available to employers of any size that paid qualified wages to their employees. However, different rules apply to employers with under 100 employees and under 500 employees for certain portions of 2020 and 2021.

Did the ERC expire?

Yes. The Employee Retention Credit (ERC) was retroactively eliminated as of September 30, 2021, except for startup recovery businesses defined by the Infrastructure Investment and Jobs Act (IIJA). While the ERC is no longer available, businesses can still file for the periods it covered if they have yet to do so.

Who is eligible for the Employee Retention Credit?

Employers who paid qualified wages to employees from March 13, 2020, through December 31, 2021, are eligible. These employers must have one of the following to earn the credit:

• Sustained a full or partial suspension of operations due to an order from an appropriate governmental authority limiting commerce, travel, or group meetings because of COVID-19 during 2020 or the first three quarters of 2021.
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021.
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

Employers in U.S. territories who meet these requirements are eligible to claim ERC credit.

The ERC is not available to individuals, with one exception: self-employed individuals with employees who otherwise meet the requirements to be an eligible employer may qualify for the ERC based on qualified wages they paid to employees. However, when calculating the credit, they cannot include their self-employment earnings or wages paid to related individuals. 

How do you calculate the Employee Retention Credit?

To calculate the ERC, eligible companies should claim a refundable credit against what they typically pay in Social Security tax on up to 70% of the qualified wages paid to employees. The maximum amount of qualified wages for any one employee per quarter is limited to $10,000 — including qualified health plan expenses — with a maximum credit for a quarter with respect to any employee of $7,000, for a total credit of $28,000 per employee for calendar year 2021.

Can you still claim the employee retention credit?

Employers who did not claim the employee retention credit on an originally filed quarterly payroll tax return in 2021 can claim the credit by filing an amended return for each quarter for which they were eligible for the credit. Employers must file amended returns for any quarter ending in 2021 no later than April 15, 2025. Employers who file an annual payroll tax return can file an amended return using Form 944-X or 943-X to claim the credits.

Employers claiming the credit on an amended payroll tax return may also need to file an amended income tax return for the tax year in which the credit is claimed. Employers should also ensure that wages taken into account for the COVID-19 employee retention credit were not taken into account for other credits.

Can you get the Employee Retention Credit and Paycheck Protection Program?

Yes. The CARES Act states that any employer receiving a Paycheck Protection Program (PPP) loan was not eligible for the ERC unless the PPP loan was repaid by May 18, 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 later repealed this provision, making recipients of a PPP Loan eligible for the ERC. However, wages paid with the PPP loan that are forgiven do not count as qualifying wages for the credit.