The Employee Retention Credit (ERC) is a refundable tax credit provided under the CARES Act for eligible employers that experience a significant decline in gross receipts or certain closures related to COVID-19. This tax credit is equal to 50% of qualified wages that eligible employers pay their employees from March 13, 2020 through December 31, 2020 (up to $10,000 of qualified wages per employee) and 70% of qualified wages that eligible employers pay their employees in 2021 (up to $10,000 of qualified wages per employee per calendar quarter of 2021). The ERC is intended to help business owners keep employees on the payroll and minimize the number of workers filing for unemployment benefits.
Eligible employers can benefit from the ERC in one of three ways.
- They can reduce the employment tax deposits they are otherwise required to make.
- If they had an average of 500 or fewer full-time employees in 2019, they can file a claim for an “advance refund” of the credit that is anticipated for a given quarter.
- When they file their quarterly federal employment tax return (Form 941), they can request a refund of any credit not previously taken as an advance refund or by reducing tax deposits.
For many business owners, this tax credit could be a better fit than some of the relief bill’s more well-known loans and grants. Like the Paycheck Protection Program (PPP), the ERC is designed to keep employees on the payroll and out of the unemployment office. But unlike the PPP, the ERC isn’t a loan. So what is it? Let’s take a closer look.