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Employee Retention Credit

The Employee Retention Credit (ERC) is a program created in response to the COVID-19 pandemic and economic shutdown that provides companies and small businesses with a refundable tax credit for maintaining their payroll during 2020 and 2021.

What is the Employee Retention Credit?

Introduced in the 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.

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The initial credit was worth 50% of qualified employee wages up to $10,000 for any one employee, granting a maximum credit of $5,000 for wages paid from March 13, 2020, to December 31, 2020. The percentage of qualified wages was increased to 70% for 2021. The per employee wage limit was increased from $10,000 per year to $10,000 per quarter.

Who is eligible for the Employee Retention Credit?

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

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  • 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

  • experienced a significant decline in gross receipts during the calendar quarter.

What is 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.

How do I calculate the Employee Retention Credit?

The 2020 COVID-19 employee retention credit is equal to 50% of qualified wages. The maximum amount of qualified wages any one employee is limited to $10,000 (including qualified health plan expenses), with a maximum credit for any employee of $5,000.

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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).

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Wages paid with the PPP loan that are forgiven do not count as qualifying wages for the credit.

How do you claim the employee retention credit?

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 941-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.

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Use the Book Now link to schedule an appointment or contact the Accounting Solutions office at 701-837-0348 or admin@accountingsolutions.accountants for help in claiming ERC credits.

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