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Employee Retention Credits (ERC)

The Employee Retention Credits (ERC) are tax credits funded by the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act to incentivize and enable employers keep their workers on payroll. Note that businesses cannot take advantage of both the ERC and the Paycheck Protection Program – these two programs are mutually exclusive – so be sure to compare these programs before utilizing them to assess which (if either) of them will best meet your needs.

As of the start of 2021, the ERC offers a “fully refundable” tax credit for eligible employers that equals 70% of qualified wages. Qualified wages include up to $10,000 per employee per quarter for each of the first two quarters of 2021, so the maximum credit an employer can receive per employee in 2021 is $14,000. The credit is taken on the employer portion of social security taxes, but if the credit is greater than social security taxes owed, the remaining amount will simply be paid directly (aka “fully refunded”) to employers.

Note that for 2021, the ERC tax credit is available to businesses that took a loan under the Paycheck Protection Program (PPP), including first-round PPP borrowers who originally were ineligible to claim the tax credit; however, the credit can only be taken on wages that will not be forgiven under PPP.

Businesses are eligible to take this credit during any quarter in which either of the following conditions apply:

  1. You are impacted by forced closures or quarantines and have seen more than 20% drop in gross receipts in the quarter compared to the same quarter in 2019
  2. You are compelled to fully or partially suspend operations due to a government order (note that this latter condition would apply to a restaurant limited to takeout only, for example, but it would not apply to a farm deemed to be providing essential services).

Employers can take advantage of this credit when filing federal tax returns with IRS forms 941 or 943, and/or by using IRS form 7200 to claim a refund (aka “advance payment”). See this IRS webpage and this FAQ page for more details on the ERC and how to claim the credit.

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