The Employee Retention Credit (ERC) is a refundable tax credit created to encourage businesses to keep employees on their payroll during the COVID-19 pandemic. It was introduced as part of the CARES Act in 2020 and later amended by subsequent legislation

Key Features of the Employee Retention Credit

• Purpose: To provide financial relief to eligible employers who retained employees despite economic disruptions caused by COVID-19

• Eligibility: Available to certain businesses and tax-exempt organizations that experienced full or partial suspension of operations due to government orders or a significant decline in gross receipts during 2020 and 2021. Recovery startup businesses also qualify for certain periods

• Credit Amount:
  • For 2020, the credit was 50% of qualified wages paid to eligible employees, up to $10,000 per employee for the year, meaning a maximum credit of $5,000 per employee

* For 2021, the credit increased to 70% of qualified wages paid per quarter, with a limit of $10,000 per employee per quarter, allowing a maximum credit of $7,000 per employee per quarter (up to $28,000 per employee for the year)

• Qualified Wages: Include wages subject to Social Security tax and certain health plan expenses paid to employees during eligible periods. The definition of eligible employees depends on employer size and whether employees were working or not

• Interaction with Other Programs: Employers cannot claim the ERC on wages counted for Paycheck Protection Program (PPP) loan forgiveness or certain emergency paid leave programs

• Claiming the Credit: Employers can reduce their payroll tax deposits by the credit amount or claim it retroactively by filing amended payroll tax returns

In summary, the ERC is a refundable payroll tax credit designed to help businesses offset the cost of retaining employees during the pandemic by providing a significant tax credit on qualified wages paid during specified periods in 2020 and 2021