The Employee Retention Credit: What is it?

In recognition of the challenges posed by COVID-19, Congress introduced the Employee Retention Credit (ERC) to help businesses and not-for-profits retain employees during the pandemic, and these credits are still available today. This article will provide an overview of the ERC, including qualification criteria and the process for claiming the credit.

To qualify for the ERC, you must have W-2 employees, and meet either the gross receipts test or the full or partial government ordered shutdown test.

1.  Gross Receipts Test:

• For 2020, compare gross receipts for each quarter in 2020 with the corresponding quarters of 2019.  If there is a more than 50% decline in gross receipts, you may qualify for that quarter.
• For 2021, compare gross receipts for the 1st, 2nd, and 3rd quarters of 2021 with the corresponding quarters of 2019.  If there is a more than 20% decline in gross receipts, you may qualify for that quarter.

2.  Government Ordered Shutdown Test:  If your business or not-for-profit was subject to a full or partial government ordered shutdown due to COVID-19, you may qualify for the time in which you were fully or partially closed.  

Calculating the Credit:  The Employee Retention Credit is calculated based on qualified wages paid to eligible employees during the eligible period. 

For 2020, the credit is equal to 50% of qualifying wages, with qualifying wages being capped at $10,000 per employee for all of 2020.  Therefore, the maximum credit for 2020 is $5,000 per employee. 

For 2021, the credit is equal to 70% of qualifying wages, with qualifying wages being capped at $10,000 per employee per quarter in 2021 for the 1st, 2nd, and 3rd quarters.  The maximum credit for 2021 is $21,000 per employee ($7,000 per employee per quarter for Q1, Q2, and Q3).

Claiming the Employee Retention Credit:  To claim the employee retention credit, an amended payroll report must be completed for each affected period (Form 941-X for general employers and Form 943-X for farmers).  The amended payroll form will be filed with the IRS to request the credit.  For the 2020 credit, the deadline is April 2024 and April 2025 for the 2021 credit.

The information contained above is a general overview of the ERC, a full description of which is beyond the scope of this article.  Calculating and applying for this credit can be complex and we encourage you to contact our office before doing so.  We have reached out to many of you regarding the Employee Retention Credit and still plan to reach out to many more.  If you haven’t heard from us yet and are interested to see if you qualify, please give us a call.  

Disclosure:  Tax law is constantly changing due to new legislation, cases, regulations, and IRS rulings. Our Firm closely monitors these changes. Please call us before implementing any information discussed in this article, or if you need additional information concerning any item mentioned above. We will gladly assist you.