- The Employee Retention Credit (ERC) is a tax credit from the Internal Revenue Service (IRS) that business owners who pay employees may be eligible for.
- The ERC was originally a government order under the U.S. Congress’s CARES Act, which was the Coronavirus aid package.
- Not all businesses are eligible for the ERC — you’ll need to prove you went through a significant decline or suspension of operations.
- This article explores how the ERC credit works, how a small employer can qualify for it, how you’ll receive the credit as a taxpayer, and more.
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How Does the Employee Retention Credit Work?
Note: The IRS announced that they’re halting new applications until the beginning of 2024, and potentially later. Keep an eye out for updates.
The Employee Retention Credit (ERC), also called the Employee Retention Tax Credit (ERTC), is a refundable payroll tax credit that was meant to help businesses during the pandemic. Eligible businesses could access the tax credit if they kept their employees on payroll during the eligible period.
To be eligible, businesses must have experienced financial hardship due to the pandemic.
Although the ERC program is officially over, you may still be able to apply to claim a retroactive credit. You have until three years after the wages have been paid to claim the credit. You would have to have paid wages up until September 30, 2021 — but some businesses may qualify for wages paid through December 31, 2021. To claim the credit, you must file Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund for the appropriate quarter(s).
Check out IRS Notice 2021-20 for more information on applying for the credit.
Who Qualifies for the Employee Retention Credit?
The ERC credit is only open to eligible businesses and tax-exempt organizations, not individuals. Eligibility for the ERC includes employers that paid qualified wages to one or more employees between March 12, 2020 and January 1, 2022. To get the credit, your business must meet eligibility requirements, like:
- Your business experienced a partial suspension or full shutdown of operations because of the COVID-19 pandemic, or
- Your income was significantly impacted during the eligibility periods, or
- You were a recovery startup business during the third or fourth quarter of 2021.
However, you can’t claim the ERC on payroll costs reported for forgiveness on a Paycheck Protection Program loan (also called a PPP loan forgiveness). These wages also can’t be part of the Shuttered Venue Operators Grant or the Restaurant Revitalization Fund.
Calculating the ERC for My Business
Generally speaking, the amount of the credit your business can get usually lines up with the amount of FICA taxes (usually Medicare and Social Security) you pay for your employees. Businesses can get a maximum credit of $28,000 per employee for 2021 employees.
The credit amount is calculated based on a percentage of qualifying wages paid to employees during specific quarters.
How Is the Employee Retention Credit Paid to an Employer?
The ERC is typically claimed by an eligible employer on their federal employment tax return. The credit can be used to offset the employer’s share of Social Security tax liability.
If the amount of the ERC is higher than the employer’s Social Security tax for any calendar quarter, the extra credit can be refunded to the employer.
How Will I Receive My Employee Retention Credit Refund?
The refund can be received through various methods, depending on how the employer chooses to handle their tax payments and refunds. Common methods for receiving tax refunds from the IRS include:
- Direct deposit: The IRS can deposit the refund directly into the employer’s designated bank account.
- Paper check: The IRS can mail a paper check to the employer’s address on file.
- Electronic funds withdrawal: If the employer used electronic funds withdrawal for tax payments, the IRS may use the same method to issue the refund.
The specific method used to receive your ERC refund can depend on the preferences you set and the information provided on your tax returns. Make sure your banking information and mailing address are up to date with the IRS to avoid any delays in receiving the refund.
Do Employees Get Money From the Employee Retention Credit?
The Employee Retention Credit (ERC) is a tax credit that businesses can claim, not employees. The purpose of the ERC is to offer financial support to eligible employers to encourage them to retain their employees during challenging economic times, such as the COVID-19 pandemic. It’s not directly distributed to employees.
Employees may indirectly benefit from the ERC if the business they work for receives the credit and uses it to keep employees on the payroll, thereby avoiding layoffs or furloughs. This can help ensure that employees continue to receive their wages and benefits during challenging times. However, the ERC itself doesn’t result in direct payments to individual employees.
How Long Does it Take to Get the Employee Retention Credit Money?
The timing for receiving the Employee Retention Credit money can vary based on several factors, including the processing time of the IRS. Generally, the IRS aims to process tax credits and refunds as promptly as possible, but the exact timeline can depend on the complexity of the claim and the workload at the IRS.
In some cases, businesses may receive the credit within a few weeks of submitting their claim. However, it’s essential to note that during periods of high demand or if there are errors in the application, processing times can be longer.
At the time of writing, the IRS has said that due to a large number of claims it needs to process, it will take longer for current applications to make their way through the system.
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Do I Have to Pay Taxes on the Employee Retention Credit?
The Employee Retention Credit (ERC) is a refundable tax credit intended to provide financial relief to eligible employers. Generally, tax credits aren’t considered taxable income, as they are a reduction in the tax liability or a refund for taxes already paid.
According to IRS guidance, the ERC isn’t included in the gross income of the employer for federal income tax purposes. Therefore, it’s not subject to federal income tax. However, the credit may impact the deduction for qualified wages.
How Much Money Will I Receive From the Employee Retention Credit?
The amount of the credit a business can receive from the ERC can vary depending on several factors, including the specific provisions outlined in the legislation, the number of eligible part-time and full-time employees, the length of the credit claimed, and the wages paid to employees during the eligible periods.
Initially, under the CARES Act, the credit was up to 50% of qualified wages paid to each employee, up to a maximum of $10,000 per employee for all calendar quarters. However, subsequent legislation, such as the Consolidated Appropriations Act and the American Rescue Plan Act, modified and expanded the ERC. These increased the maximum credit amount and made it available to a broader range of businesses.
To accurately determine the potential amount of the ERC, carefully review the requirements provided by the IRS and consult with a qualified tax professional who can provide personalized guidance based on the business’s individual circumstances.
How Much Money Will I Get if I Have a $50,000 Payroll?
The amount of money your business can get from the ERC is calculated based on specific rules and guidelines outlined in the legislation.
If you have a $50,000 payroll, the specific amount you might receive from the ERC would depend on several factors, including the number of full-time employees, the period of time you’re claiming, and the eligibility criteria that apply to your business.
It’s a good idea to meet with a qualified tax professional to figure out the exact amount you can expect.
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This article was originally written on December 6, 2023.
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