There is money available for business who are willing to put in the work. And, frankly, it’s a rather light lift. The Employee Retention Credit (ERC) is one of many programs launched during the 2020 pandemic that have allowed businesses to retain and thrive during uncharted unprecedented economic times.
What is the Employee Retention Credit?
The Employee Retention Credit, introduced in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), was created by Congress to incentivize employers to retain their workforce during the months affected by the coronavirus pandemic in 2020. Initially, the tax credit amounted to 50% of qualified employee wages, with a cap of $10,000 per employee. This equated to a maximum credit of $5,000 for wages paid between March 13, 2020, and December 31, 2021. However, it has since been updated to increase the percentage of qualified wages to 70% for 2021, along with an increase in the per-employee wage limit from $10,000 per year to $10,000 per quarter.
The credit is available to all eligible employers, regardless of size, who pay qualified wages to their employees. However, different rules apply to employers with under 100 employees and 500 employees during specific periods in 2020 and 2021.
To qualify for the Employee Retention Credit in 2023, an eligible employer must be a private-sector employer or tax-exempt organization engaged in a trade or business during that calendar year. The employer must have either fully or partially suspended operations during any calendar quarter due to government orders limiting commerce, travel, or group meetings because of COVID-19 or experienced a significant decline in gross receipts during the quarter. The eligibility rules have been updated for 2023.
For an employer to be considered for the credit, a substantial portion of their business operations must have been suspended. In the context of the employee retention credit, a part of an employer’s business is deemed significant if the gross receipts from that portion of operations account for at least 10% of the total gross receipts (calculated using the same quarter in 2019), or the hours of service performed by employees in that portion of the business is not less than 10% of the total hours of service performed by all employees in the employer’s business.
A partial suspension of business operations occurs when an employer’s activities are limited due to federal, state, or local orders, proclamations, or decrees that directly impact the employer’s operations. Partial suspensions could arise from restrictions on business hours or the closure of specific functions that cannot be performed remotely. For instance, if a restaurant had to close its dining room as per a local government order but could continue providing carry-out or delivery service, it would be considered to have partially suspended operations.
The calculation of the Employee Retention Credit for 2023 is based on 70% of qualified wages. The maximum amount of qualified wages per employee per quarter is capped at $10,000, including qualified health plan expenses. Consequently, the full credit for a quarter per employee stands at $7,000, totaling $28,000 per employee for the entire calendar year 2021.
To claim the employee retention credit, employers must report the total qualified wages and the corresponding COVID-19 employee retention credit on Form 941 for the respective quarter when the qualified wages were paid. For wages paid from March 13 to 31, 2020, eligible for the credit, they were reported on the second quarter Form 941 (Employer’s Quarterly Federal Tax Return) to determine the employer’s praise for the quarter ending June 30, 2020. The credit was allowed against the employer portion of social security taxes (at a 6.2% rate) and railroad retirement tax on all wages and compensation paid to employees for that quarter.