The employee retention credit (ERC), is the refundable tax credit for business owners for retaining employees throughout the COVID-19 pandemic. This was signed into law on March 27, 2020, as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This was further significantly expanded in 2021.
Business need to be eligible and can claim up to $5,000 in refundable tax credits for each employee who were on the payroll in 2020 and up to a $7,000 credit per quarter (excluding Q4) for each employee in 2021. The calculation and procedures are complex.
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The ERC is a refundable tax credit designed for businesses who continued paying employees while shutdown due to the COVID-19 pandemic or had significant declines in gross receipts from March 13, 2020 to December 31, 2021.
Determining whether a business is eligible for the ERC is very complex. Your business must meet the gross receipts test (50% or more reduction for 2020 or a 20% or more decline for 2021 qualifying quarters when compared to 2019 quarters) or experience a full or partial suspension of operations because of a government order. Whether a business experienced a partial suspension is a facts and circumstances determination and will vary depending on the location of the business and the government orders.
Salaries of majority owners and their families cannot be included in the ERC calculation. Family attribution rules apply; if the business owner has any living relatives.
Legislation passed at the end of 2020 allows businesses that received PPP to apply for the ERC for qualifying quarters as long as the same salaries are not used and the business meets one of the qualifications for the ERC.
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