What is ERC - Employee Retention Credit
The ERC is designed to provide financial relief to eligible employers who have experienced a significant decline in gross receipts or were subject to a full or partial suspension of their operations due to government orders. It is available to businesses of all sizes, including tax-exempt organizations, and covers wages paid to employees.
Under the original provisions of the CARES Act, eligible employers could claim a refundable tax credit equal to 50% of qualified wages paid between March 13, 2020, and December 31, 2020. The maximum credit per employee was $5,000 for the entire period.
However, the Consolidated Appropriations Act, 2021, signed into law in December 2020, extended and expanded the ERC. The changes made the credit available to more employers and increased the credit rate to 70% of qualified wages. It also raised the maximum credit per employee to $7,000 per quarter for the first two quarters of 2021.
The American Rescue Plan Act, signed into law in March 2021, further extended the ERC through December 31, 2021, and made additional changes to expand eligibility and increase the credit amount. The maximum credit per employee was increased to $10,000 per quarter for each of the first three quarters of 2021. This means the annual maximum for an employee is $26,000.
To qualify for the ERC, employers must meet specific criteria, including demonstrating a decline in gross receipts or experiencing a full or partial suspension of operations. The credit is claimed on an employer’s federal employment tax return, usually Form 941, and can be used to offset payroll taxes. If the credit exceeds the employer’s payroll tax liability, it is refundable.