The employee retention credit is a refundable tax credit for eligible employers that retain their employees and pay them wages during the COVID-19 pandemic. The credit is available for eligible employers that have been impacted by the pandemic and are experiencing economic hardship, as well as those who have made a good faith effort to comply with applicable employee safety requirements. To be eligible for the credit, employers must have either (1) closed their business due to government orders related to COVID-19, or (2) experienced a significant decrease in gross receipts.
For businesses that have been impacted by the pandemic but are still open, the employee retention credit is available for each employee that the employer pays wages to. The amount of the credit is 50% of the qualified wages paid to each employee, up to $10,000 of wages per employee per year. The employee retention credit is available for wages paid from March 13, 2020 through December 31, 2020.
Does the Employee Retention Credit Have to be Paid Back?
The credit is equal to 50% of the qualified wages (up to $10,000) that an eligible employer pays to each employee during the covered period. To be eligible for the employee retention credit, an employer must have experienced a full or partial suspension of operation due to a government order related to COVID-19, or have experienced a significant decline in gross receipts. The employee retention credit is available for wages paid from March 13, 2020 through December 31, 2020. The credit is claimed on the employer’s quarterly employment tax return (Form 941). For wage payments made after December 31, 2020, the employee retention credit is not required to be paid back. However, any overpayment of the employee retention credit will be subject to interest and penalties. For more information on the employee retention credit, please see IRS Publication 1586.
Calculating Your Credit
The employee retention credit is available for wages paid from March 13, 2020 through December 31, 2020. The credit is refundable, meaning that if an employer’s tax liability is less than the amount of the credit, they will receive a refund for the difference.
To calculate your employee retention credit, you will need to total the qualified wages you paid to all eligible employees during the relevant calendar quarters. You will then need to multiply that number by 50% to determine the amount of the credit. For example, if you paid $100,000 in qualified wages during a relevant calendar quarter, your employee retention credit would be $50,000.
Once you have calculated your employee retention credit, you will claim the credit on your quarterly employment tax return (Form 941), as mentioned above. You can also elect to reduce your deposit of employment taxes that you would otherwise be required to make. If your employee retention credits exceed the employment taxes that you owe, you will receive a refund from the IRS.
Looking Onward with the ERC
Given the ongoing economic uncertainty caused by the pandemic, many employers are counting on the employee retention credit to help them retain their workers. Without the credit, they may be forced to lay off employees or reduce their hours. If you are an employer who is eligible for the employee retention credit, be sure to take advantage of it before it expires at the end of the year.