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.

The ERC offers a “fully refundable” tax credit for eligible employers that equals 50% of qualified wages that are paid from 3/13/20 to 12/31/20. Qualified wages are capped at $10,000 per employee, so the maximum credit an employer can receive per employee is $5,000. 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.

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

1. Your gross receipts significantly decline. Note that a “significant decline” starts at the beginning of the first calendar quarter for which an employer’s gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019, and it ends at the beginning of the first calendar quarter in which gross receipts are more than 80% of gross receipts for the same calendar 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.