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Employee Retention Tax Credit

The Employee Retention Tax Credit (ERTC) is a provision in the Coronavirus Aid, Relief, and Economic Security (CARES) Act intended to help workplaces keep employees on their payroll during the COVID-19-caused downturn. More specifically, the ERTC is a fully refundable credit that’s equal to 50% of qualified wages, up to $5,000 per employee.

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What Is the Employee Retention Tax Credit (ERTC)?

The Employee Retention Tax Credit (ERTC) is one of many relief provisions included in the CARES Act to encourage small businesses to keep employees on staff instead of furloughing or laying them off. The credit is equal to 50% of qualified wages paid to an employee between March 12, 2020 and Jan. 1, 2021, including qualified health plan expenses. The maximum amount of qualified wages that can be claimed is $10,000, which means the maximum credit for any one employee is $5,000.

The ERTC is fully refundable, and it is applied to the portion of payroll taxes paid by the employer. The IRS has developed a plan to allow eligible businesses to receive an advance payment on their credit. This is meant to alleviate liquidity concerns held by many businesses claiming the ERTC.

Who Is and Isn’t Eligible for the Employee Retention Tax Credit?

Employee Retention Tax Credit

Unlike other, more broadly applicable provisions mentioned in the CARES Act, the ERTC is only available to certain qualified employers whose businesses have been affected by the coronavirus pandemic. These include most types of businesses, except for self-employed individuals and government employers.

There are two ways to qualify for the ERTC as an eligible employer. According to the IRS website, you either need to:

  • Fully or partially suspend operations at any point during 2020 due to a coronavirus government mandate.
  • Show a significant decline in gross receipts during a calendar quarter in 2020. To qualify under this requirement, gross receipts of any given quarter must be less than 50% of the gross receipts of the same quarter in 2019.

If a business has fewer than 100 employees, all employees are eligible. If a business has more than 100 employees, only those who are being paid but not providing a service due to coronavirus-related cutbacks are eligible.

Note that any employers who receive a Paycheck Protection Program (PPP) loan are not eligible for the Employee Retention Tax Credit. In addition, employers cannot double-claim employees and their wages in relation to the Family and Medical Leave Act (FMLA) and the Work Opportunity Tax Credit.

How Much Can You Claim Through the Employee Retention Tax Credit?

The Employee Retention Tax Credit can be applied to $10,000 in wages per employee. The time frame for the credit is any wages earned between March 12, 2020 and Jan. 1, 2021. Since it only covers 50% of wages per employee, this gives employers a total credit of up to $5,000 for each employee they retain.

You cannot combine this tax credit with any others. For example, the Families First Coronavirus Relief Act (FFCRA) requires employers to provide certain affected employees with paid sick and family leave due to COVID-19. The FFCRA includes a similar tax credit, so wages cannot be counted for both. This could limit how much an employer can receive through the ERTC program.

Employers are not required to take advantage of the Employee Retention Tax Credit, and some may choose instead to lay off or furlough their employees rather than pay qualified wages and claim the ERTC.

How to Claim the Employee Retention Tax Credit

To claim the ERTC, eligible employers must report their total qualified wages and any related credits on a quarterly basis. These federal returns are typically completed through Form 941, Employer’s Quarterly Federal Tax Return. Through this filing, businesses will report their income, as well as the Social Security and Medicare taxes that were withheld from employees’ paychecks. The employer’s portion of the Social Security and Medicare taxes must be reported too.

Eligible employers should expect to receive the credit, so they can use the funds that would normally be withheld to cover employees’ qualified wages. Businesses can also try requesting an advance from the IRS.

Bottom Line

Employee Retention Tax Credit

The Employee Retention Tax Credit provides an avenue for businesses to keep employees on their payroll during the tough financial times resulting from the coronavirus pandemic. While it’s not a fix-all, the ERTC can help provide relief to businesses, especially in conjunction with other programs. Most businesses are eligible for the credit, but it’s important to see if other provisions in the CARES Act affect your eligibility.

Tax Planning Tips During the Coronavirus Outbreak

Photo credit: ©iStock.com/Gwengoat, ©iStock.com/designer491, ©iStock.com/Drazen Zigic

Sam Lipscomb, CEPF® Sam Lipscomb is a writer for SmartAsset. His work spans a wide variety of personal finance topics with expertise including retirement, investing and savings. He is particularly well versed in credit cards. Sam has been featured in The Economist and on The Points Guy. He is a Certified Educator in Personal Finance (CEPF®). Sam graduated from Kenyon College with a degree in Economics and enjoys being a go-to resource for family and friends when it comes to personal finance. Originally from Washington, DC, Sam loves all things aviation and is a Cleveland sports fan. He currently lives in New York.
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