For some business owners struggling to make ends meet during the coronavirus crisis, a tax credit like the Employee Retention Credit might be more easily accessible than other popular relief options, like loans and grants.
If you’re not quite sure how tax credits work, you’re not alone. Read on to learn more about available tax credits and use our Tax Credit Estimator to calculate your potential savings.
What is the Employee Retention Credit, and why is it important for business owners?
The Employee Retention Credit (ERC) is a refundable tax credit intended to encourage business owners to keep their employees on the payroll and minimize the number of workers filing for unemployment benefits. The credit is computed differently for 2020 and 2021:
- For 2020, the tax credit is equal to 50% of qualified wages that eligible employers pay their employees in a calendar quarter, and qualified employers can receive a maximum credit of $5,000 per employee.
- For 2021, the tax credit is equal to 70% of qualified wages that eligible employers pay their employees, and qualified employers can earn a maximum credit of $7,000 per employee per quarter (or $28,000 per employee for the year).
Unlike Paycheck Protection Program (PPP) loans and other small business relief options, businesses of all sizes are eligible to receive the ERC. And because the ERC is not a loan, recipients will never need to repay or seek forgiveness for ERC funds.
Calculating your ERC amount can get a little complicated. Don’t worry, we’ll walk you through it. Use our Tax Credit Estimator to calculate your potential ERC amount.
How to calculate the Employee Retention Credit
For 2020, the Employee Retention Credit is equal to 50% of qualified employee wages paid in a calendar quarter. The credit applies to wages paid after March 12, 2020, and before January 1, 2021. Eligible wages per employee max out at $10,000, so the maximum credit for eligible wages paid to any employee during 2020 is $5,000.
For 2021, the Employee Retention Credit is equal to 70% of qualified employee wages paid in a calendar quarter. Eligible wages per employee max out at $10,000 per calendar quarter in 2021, so the maximum credit for eligible wages paid to any employee during 2021 is $28,000.
The calculations can be tricky. Our Tax Credit Estimator above takes care of the estimation for you. Here’s what you need to do:
1. Confirm whether you had employees at some point in 2020 or 2021.
If you have not employed any workers in 2020 or 2021, you’re not eligible for the ERC. You may still qualify for paid leave credits. Keep going!
2. Establish whether you experienced a qualifying closure.
If your business was fully or partially suspended during a calendar quarter of 2020 or 2021 as a result of orders from a governmental authority limiting commerce, travel, or group meetings due to COVID-19, you may be eligible for ERC for that quarter. If not, you may still qualify based on a decline in gross receipts. Keep going!
3. Compare business revenue in 2019 to the period for which ERC is claimed.
To help determine if you qualify for the ERC, the tool will ask you to compare your business revenue in each relevant quarter of 2020 or 2021 to the same calendar quarter in 2019. For quarters in 2020, your revenue must have dropped by more than 50%. For quarters in 2021, your revenue for the current or preceding quarter must have dropped by more than 20%. If you’re not sure, the tool will help you estimate this.
If revenue hasn’t dropped by more than 20%, you may still qualify for the ERC if your business operation has been partially or fully suspended due to government orders limiting commerce, travel, or group meetings due to COVID-19.
If revenue hasn’t sufficiently dropped and your business operations haven’t been partially or fully suspended for these reasons, you’re not eligible for the ERC. But you may still qualify for paid leave credits. Keep going!
4. Enter qualified wages and health plan expenses paid during the period for which you qualify.
Next, enter qualified wages paid to all employees for the period of your full or partial suspension of operations, or the quarter for which you experienced a qualifying decline in gross receipts. not working due to COVID-19 between March 13 and June 30, 2020. Qualified wages include wages and health plan expenses paid for the period of your economic hardship. For larger employers, qualified wages will generally be limited to wages and health plan expenses for the period of time that an employee is not working due to the economic hardship (and, for 2020, may not take into account increases in wages after the beginning of the economic hardship).
5. Learn more about your estimated Employee Retention Credit.
And find out how you can claim your credit.
Additional tax credits you may qualify for
Regardless of whether you qualify for the ERC, you may still qualify for paid sick leave and paid family leave tax credits or the Social Security tax deferral. Our Tax Credit Estimator walks you through these estimations.
Emergency Sick and Family Leave Tax Credit
If your employees took sick leave for themselves or to care for others due to COVID-19 in 2020 or 2021, you may qualify for the Emergency Sick Leave Tax Credit. Our Tax Credit Estimator estimates this credit for you. You need to know the amount of:
- Sick leave wages paid to employees between April 1, 2020, and December 31, 2020
- Sick leave wages paid to employees who took time off to care for others between April 1, 2020, and December 31, 2020
- Qualified sick leave health plan expenses and the employer’s share of Medicare tax allocable to sick leave wages paid between April 1, 2020, and December 31, 2020
- Family leave wages paid between April 1, 2020, and December 31, 2020
- Qualified health plan expenses and the employer’s share of Medicare tax allocable to family leave wages paid between April 1, 2020, and December 31, 2020
Note: To estimate 2021 tax credits, you’ll need to know the amount of qualified sick leave wages paid to any employees between January 1, 2021, and March 31, 2021.
How do I claim an Employee Retention Credit?
Eligible employers can receive a current cash benefit to fund qualified wages in one of two ways.
- By reducing the employment tax deposits they are otherwise required to make
- After reducing tax deposits, an eligible employer that had 500 or fewer average full-time employees in 2019 may file a claim for an “advance refund” of the credit that is anticipated for a given quarter
Here’s how it works:
- If you deposit federal employment taxes weekly or semi-weekly, you can reduce the tax deposits by the credit amount that applies to the qualified wages for that pay period.
- If your credit amount is greater than your total employment tax deposits for the pay period, and you are under the 500 employee threshold, you can get an advance refund of the credit using Form 7200. You can file this form multiple times throughout the quarter.
- When you file Form 941 quarterly, you can check your credit amount against the tax deposits already made during the quarter. If there is still credit left, it will be refunded once you file this form.
Remember, you can file for this credit quarterly, so check back here to estimate your credit amount for the next calendar quarter.
What is the ERC deadline?
The Employee Retention Credit is available through December 31, 2021.
Where can I learn more about the ERC?
Learn more about the Employee Retention Credit on the IRS website.
Find out what you need to know about the ERC from the U.S. Department of Treasury.
Download a quick guide to the ERC from the U.S. Chamber of Commerce.
The resources described above are made available to businesses within the United States of America.
COVID-19 relief programs are evolving regularly. Please visit SBA.gov for the most up to date information.
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