The Employee Retention Tax Credit (ERC) is a program initiated by the CARES Act in 2020 and revised by the Consolidated Appropriations Act of 2021 to provide tax relief to employers adversely impacted by COVID-19, who but have continued to employ workers. Qualifying businesses are those that were either:
- Required to suspend operations due to governmental mandate at any time between March 2020 and June 2021
- Or, experienced a reduction of gross revenue of 50% or more during any quarter in 2020/21 compared with the same quarter in the prior year.
Once a business experienced a quarter in which either 1 or 2 above occurred, they could claim a maximum credit of $5,000 per employee who was paid “qualified wages.” Eligible employers can get immediate access to the tax credit by reducing the amount of payroll tax deposits they are required to make on qualified wages. Qualified wages is defined a couple ways:.
For employers averaging 100 or fewer full-time employees during 2019, qualified wages are those wages, including health care costs, (up to $10,000 per employee) paid to any employee during the period operations were suspended or the period of the decline in gross receipts, regardless of whether or not its employees are providing services.
For an employer averaging more than 100 full-time employees during 2019, qualified wages are wages, including certain health care costs, (up to $10,000 per employee) paid to employees that are not providing services because operations were suspended or due to the decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
The credit under the CARES Act equals 50% of eligible wages up to $10,000 per quarter. Under the Consolidated Appropriations Act, the amount of the credit increases to 70% of eligible wages up to $10,000 per quarter.
Under the CARES Act, businesses receiving a PPP loan were ineligible to take the ERC. This has changed with the passage of the Consolidated Appropriations Act. Businesses can apply retroactively for the credit from 2020.
The benefit of the ERC is that it is easy to access and provides quick use of funds. Employers take the credit on payroll taxes paid to the government using Form 941. Or they can request an advance by completing Form 7200 Advance Payment of Employer Credits Due to COVID-19