The coronavirus relief legislation passed at the end of 2020 included an enhancement to the Employee Retention Credit (ERC) that makes it available to more businesses.

What is the Employee Retention Credit?

The ERC provides for a refundable tax credit for companies that continue to pay their employees, even if the business is closed or experiences a slowdown due to the pandemic.

Originally, the ERC was only available to businesses that did not also obtain a Paycheck Protection Program (PPP) loan, but the year-end legislation now allows those companies to utilize the ERC. The credit is available for wages paid after March 12, 2020 and before July 1, 2021, with somewhat different provisions for 2020 vs. 2021. The good news is that even if an employer received the maximum ERC in 2020, qualified employers can still claim the maximum for 2021.

Who is an Eligible Employer?

The credit is available to employers whose operations were fully or partially suspended due to a COVID-19 related government shutdown order or whose gross receipts declined by more than 50% (2020) or 20% (2021) compared to the same quarter in 2019. Employers can continue to claim the credit for each quarter until such time as gross receipts exceed 80% compared to the same quarter in 2019. This includes employers who were previously disallowed due to the receipt of PPP funds.

How Much is the Credit?

For 2020, an employer averaging 100 or fewer full time equivalent employees (as determined by 2019 employee census counts) can claim a credit equal to 50% of up to $10,000 of qualified wages and health plan costs paid to each employee, with a maximum credit of $5,000 per employee. Employers with more than 100 full time equivalent employees can obtain a benefit, but qualified wages are limited to payments to employees who were paid not to work. Businesses with related ownership are to be consolidated when determining eligible employees.

For 2021, an employer averaging 500 or fewer full time equivalent employees (as determined by 2019 employee census counts) can claim a credit equal to 70% of up to $10,000 of qualified wages and health plan costs paid to each employee, with a maximum credit of $7,000 per employee per quarter, for a total of up to $14,000 per employee for the first two quarters of 2021. Employers with more than 500 full time equivalent employees can obtain a benefit, but qualified wages are limited to payments to employees who were paid not to work. Businesses with related ownership are to be consolidated when determining eligible employees.

How to Obtain the Credit

An employer can receive the credit by reducing employment tax deposits in the amount of the credit, or by applying for a refund on Form 941. This includes federal income tax withholding, as well as both the employer and employee portion of Social Security and Medicare taxes for all employees. If you did not take advantage of the credit in 2020 because you were a recipient of PPP funds, you may file amended Forms 941 for the affected quarters to obtain a refund.

This information is intended as a guideline, and employers should review the tax law before claiming the credit.