Employee Retention Credit

What is the Employee Retention Credit?

Introduced in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Employee Retention Credit was created by Congress to encourage employers to keep their employees on the payroll during the months in 2020 affected by the coronavirus pandemic.

When initially introduced, this tax credit was worth 50% of qualified employee wages but 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 all eligible 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.

Who is eligible for the Employee Retention Credit?

An eligible employer for the employee retention credit in 2020 is any private-sector employer or tax-exempt organization carrying on a trade or business during calendar year 2020, that either: 

1. fully or partially suspended operations during any calendar quarter due to orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19; or
2. experienced a significant decline in gross receipts during the calendar quarter.

Eligibility rules have been updated for 2021.

To be considered for the credit, more than a nominal portion of the employer’s business operations must have been suspended. For the purposes of the employee retention credit, a portion of an employer’s business is considered more than a nominal portion of operations if either the gross receipts from that portion of business operations is not less than 10% of gross receipts (determined by same calendar quarter in 2019) or the hours of service performed by employee is that portion of the business is not less than 10% of the total number of hours of service performed by all employees in the employer's business.

What constitutes a partial suspension of business operations?

To qualify as partially suspended, an employer's business operations must have been limited due to a federal, state, or local order, proclamation, or decree that affected the employer's operations.

For example, a restaurant that had to close its dining room due to a local government order but could continue to offer carry-out or delivery service was considered to have partially suspended operations.

Partial suspension of business operations could occur because an order limited the number of hours a business could be open, or some business operations had to be closed and work could not be performed remotely. 

Employee Retention Credit Eligibility tool

Due to the complexities of eligibility for the employee retention credit, Thomson Reuters has updated the Employee Retention Credit Tool to help all employers discover their eligibility for the credit.

How do I calculate the Employee Retention Credit?

The 2021 COVID-19 employee retention credit is equal to 70% of qualified wages. The maximum amount of qualified wages 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).

How do you claim the employee retention credit?

Employers reported total qualified wages and the related COVID-19 employee retention credit on Form 941 for the quarter in which the qualified wages were paid. Wages paid during the period March 13-31, 2020, that qualified for the employee retention credit were reported on the second quarter Form 941 (Employer’s Quarterly Federal Tax Return) to determine the employer's credit for the quarter ending June 30, 2020. The credit was allowed against the employer portion of social security taxes (6.2% rate) and railroad retirement tax on all wages and compensation paid to all employees for the quarter. Although it should be noted that different rules apply for 2021. If the amount of the credit exceeded the employer portion of those federal employment taxes, then the excess was treated as an overpayment and refunded to the employer.

An eligible employer could reduce its employment tax deposits during the quarter by the anticipated credit amount for the quarter. The employer could retain federal income tax withheld from employees, the employees' share of social security and Medicare taxes, and the employer's share of social security and Medicare taxes with respect to all employees. If the employment tax deposits retained were not enough to cover the anticipated credit amount the employer could file Form 7200 (Advance Payment of Employer Credits Due to COVID-19) to request advance payment of the remaining credit amount.

Additional limitations exist for 2021 – the credit is now available to small employers only.

Employers that did not claim the 2020 or 2021 employee retention credit on a quarterly payroll tax return can file an amended return for each quarter for which the credit can be claimed. Employers that file an annual payroll tax return can file an amended return using Form 944-X (Adjusted Employer’s Annual Federal Tax Return or Claim for Refund) or Form 943-X (Adjusted Employer’s Annual Federal Tax Return for Agricultural Employees or Claim for Refund) to claim the credits.

Is the ERC going to expire?

On August 4, 2021, the IRS released Notice 2021-49 that provides additional guidance regarding claiming the Employee Retention Credit for employers who pay qualified wages after June 30, 2021, and before January 1, 2022 [IR 2021-165, Notice 2021-49]. The ERC was due to expire on December 31, 2020.  However, the Consolidated Appropriations Act (CAA) 2021, extended the ERC through June 30, 2021. The CAA also expanded the ERC rate of credit from 50% to 70% of qualified wages. The ERC was extended again to 12/31/2021 and then retroactively ended as of 9/20/21.

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

The CARES act states that any employer receiving a Paycheck Protection Program loan was not eligible for the Employee Retention Credit 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 Employee Retention Credit. However, wages paid with the PPP loan that are forgiven do not count as qualifying wages for the credit.