The Employee Retention Credit (ERC) is a refundable payroll tax credit your organization might be eligible to claim for “qualified wages”. Wages paid to full-time employees who were not active due to the pandemic could fall under part of the Coronavirus Aid, Relief, and Economic Security Act (CARES). The ERC encourages employers to retain employees on payroll despite being laid off due to the pandemic. 

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What Are the Details of the ERC?

The ERC allows employers to claim a refundable credit of up to $5,000 for every full-time equivalent employee they kept on payroll between March 13, 2020, to Dec. 31, 2020. It also provides up to $14,000 for employees retained between Jan. 1, 2021, to June 30, 2021.

How to Qualify for the ERC

If your organization was ordered to either fully or partially close due to pandemic restrictions or your gross receipts dropped under 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021) you can qualify for the ERC. As well, if you weren’t in business in 2019 the corresponding quarters from 2020 can be used. However, it also depends on the period you wish to claim the ERC:

For claims between March 13, 2020, through Dec. 31, 2020, your organization must:

You don’t qualify if:

For claims between January 1, 2021, and June 30, 2021:

You don’t qualify for the same reasons during the period above.

How Do You Claim the ERC?

Organizations can reduce their payroll taxes sent to the IRS right away to claim the ERC. In the cases where credits are more than payroll taxes, you are allowed to request a direct refund from the IRS. You can hold onto the amount of employment taxes you would have deposited including:

The amount you retain can only be up to the amount of the credit to which you are entitled and cannot include any wages excluded from the ERC.

What Updates Have Been Introduced for the ERC?

According to the Taxpayer Certainty and Disaster Tax Relief Act (TCDTR) of 2020, the following retroactive updates were applied to the Consolidated Appropriations Act (CAA) of 2021 between March 13, 2020, to Dec. 31, 2020:

Between January 1, 2021, to June 30, 2021, the ERC rate increased from 50% to 70% of qualified wages for each employee with a per-employee wage limit increase from $10,000 a year to $10,000 a quarter for 2021.

How Do Updates Impact Eligibility for the ERC?

Eligibility for employers is determined by gross receipts which have risen from below 50% to below 80% compared to the same quarter in 2019. So if your gross receipts decreased over 20% in 2021, you qualify for the credit. You can also now base eligibility on the immediately preceding calendar quarter instead of Q1 and Q2 2021, compared to the same quarter in 2019. For companies that weren’t yet operating in 2019, you are allowed to compare 2021 quarterly gross receipts to the same 2020 quarters to see if you qualify.

What Organizations Can Claim the ERC?

Eligible organizations in 2021 include:

As well, the government redefined what they consider to be “large employers” from over 100 employees to over 500. As a result, more organizations might find they can qualify and include the wages paid to those not working and those who are.

What Else Affects Qualified Wages For Employee Retention Credit?

As mentioned, under the new updates, even if your organization just paid healthcare coverage, you could claim this under the ERC. You can also include wages that aren’t more than what an employee would have received in the 30 days before the qualifying period, so bonuses paid to essential workers for example could be claimed. You can’t receive the ERC for the following wages:

As well, for employees granted a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code, their wages don’t qualify.

Advanced ERC Payments 2021

For employers with less than 500 full-time equivalent employees, or that are part-time or seasonal employers you can receive advanced ERC payments for the quarter where the wages were paid to those employees. This includes employers not yet existing in 2019. Employers must complete Form 7200, Advance of Employer Credits Due to COVID-19.

About The Author

Ingrid Principe

Ingrid is the Content Marketing Manager at Paypro, managing both inbound and outbound marketing initiatives for the company. She has 15+ years’ of extensive marketing communications experience, leveraging brand awareness and strategic partnerships to increase sales revenue for a diverse group of B2B brands.