Businesses had no other choice than to shut down their operations when the COVID-19 pandemic struck in 2020. In response, the United States Congress passed programs to provide financial assistance to businesses, including the Employee Retention Credit (ERC).
The ERC was for businesses that struggled to maintain their headcounts. It gave eligible employers payroll tax credits for wages and health insurance paid to employees. However, the ERC ended once the Infrastructure Investment and Jobs Act signed into law, November 2021.
Despite the program ending, eligible businesses still have the opportunity to claim ERC for up to 3 years retroactively. That means employees can still claim ERC for actions on their tax returns during the pandemic until 2024.
What Is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a refundable tax credit for businesses that continue paying employees during the shutdown due to the pandemic or suffered significant declines in revenue from March 13, 2020, to December 31, 2021. Eligible employers can claim the ERC on an original or adjusted employment tax return for a period within the dates above.
The U.S. Congress established the ERC to encourage employers to maintain their employees and keep them on the payroll during the period affected most by the COVID-19 pandemic. It was first introduced in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act and has been updated twice since it was originally created.
The version of the ERC that’s available at the time of this writing (mid-2023) offers a higher credit than announced initially and includes more businesses. Information from when the ERC was originally introduced may now be irrelevant, making it complicated for employers to determine whether they qualify and understand the correct processes for receiving it.
How Much Is the Employee Retention Credit Worth?
The Employee Retention Credit (ERC) can be a lucrative cash windfall for qualifying employers. Companies could receive up to a maximum of $5,000 per employee in 2020. For 2021, however, it was a maximum of $7,000 per employee per quarter. Since 2021 is a more lucrative year for ERC, up to $28,000 per employee could potentially be claimed.
Who Is Eligible to Receive the ERC?
All qualified businesses that pay employees appropriate wages are entitled to ERC. Larger companies, however, must be mindful of the credit constraints linked to their overall number of part-time and full-time employees, for instance, if businesses had over 100 employees in any quarter in 2020 or more than 500 workers in any quarter in 2021.
What is the Filing Procecss for Employee Retention Credit?
To receive the ERC, eligible employers must report the total qualified wages and health insurance cost on their quarterly employment tax returns, typically using Form 941, starting with the 2nd quarter of 2020 through the third quarter of 2021.
Employers are also eligible to retain the employment taxes that they otherwise would have filed, including federal income tax withholding, Medicare, and Social Security, to total the amount of the credit.
Businesses aren’t obligated to wait to receive credit but can get immediate relief through the reduction of employment taxes initially paid. Companies are still eligible to file for the ERC retroactively by using Form 941-X, which adjusts employment taxes that were filed within the last three years.
With the extension of the ERC, businesses can still retroactively claim the credit through 2024, but the credit is only applicable to wages from the 2020 tax year and also the first three quarters of the 2021 tax year. Businesses that claim ERC for relevant quarters can no longer apply for the credit.
The United States Congress established the Employee Retention Credit (ERC) in March 2020 to allow business owners to continue paying their employees throughout the COVID-19 pandemic—however, the credit ended in late 2021.
Employers still have time to submit a claim record from March 2020 to September 2021. Startup firms in recovery can still file for March 2020 through December 2021. To ensure that you file for the credit correctly, outsourcing this task can be a wise business decision.