Tax Credits

Employee Retention Credit Guide & Examples (June 2023)

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In the face of unprecedented challenges brought on by the COVID-19 pandemic, businesses worldwide have grappled with the need to retain their most valuable asset—talented employees. Enter the Employee Retention Credit (ERC), a lifeline provided by the IRS that has become a crucial tool for businesses seeking to stay afloat and thrive amidst uncertainty.

The ERC is a tax credit introduced by the IRS in response to the coronavirus pandemic. It aims to provide financial relief to eligible employers who have been significantly impacted by the crisis. The ERC allows businesses to claim a refundable tax credit for a percentage of qualified wages paid to employees, including healthcare costs.

Below, we explain more about what the ERC is, how it works, and if your business qualifies. We’ll also share examples to help you see clearly how the relief package offers financial relief and incentivizes employers to retain their valuable talent.

What is the Employee Retention Credit (ERC)?

As the pandemic forced widespread lockdowns and economic uncertainties loomed large, countless businesses struggled to stay afloat and retain their employees.

The Employee Retention Credit (ERC) has emerged as a vital lifeline for businesses navigating the challenges resulting from the COVID-19 pandemic. It’s part of what’s considered the largest government stimulus program in history.

This refundable tax credit was designed to support employers who continued to pay their employees during periods of shutdown or experienced significant declines in gross receipts between March 13, 2020, and December 31, 2021, as per the IRS.

Unlike the Paycheck Protection Program (PPP), which provided forgivable loans, the ERC offers relief by reducing an employer’s payroll taxes. By taking advantage of this credit, businesses can receive financial support while retaining their valuable workforce.

Initially introduced in the CARES Act relief package, the ERC has since undergone amendments and extensions through subsequent legislation, including the Taxpayer Certainty and Disaster Relief Act, the American Rescue Plan Act, and the Infrastructure Investment and Jobs Act. These updates have expanded the eligibility and duration of the ERC, enabling more businesses to benefit from its provisions.

How does ERC work?

Is my business eligible for the ERC?

Determining your business’s eligibility for the Employee Retention Credit (ERC) is crucial before delving into its potential benefits. According to the IRS, there are two paths to qualify for the ERC:

  1. Sustained a full or partial suspension of operations: Your business experienced limitations on commerce, travel, or group meetings due to COVID-19 and received orders from an appropriate governmental authority in 2020 or 2021
  2. Experienced a significant decline in gross receipts: Your business faced a substantial decline in gross receipts during 2020 or the first three quarters of 2021. More specifically, you qualify if your gross receipts for a specific quarter were at least 50% less than the same quarter in 2019 (for 2020 quarters) or 20% less than the same quarter in 2019 (for 2021 quarters).

Alternatively, for the third or fourth quarters of 2021, you may qualify as a recovery startup business.

If you are unsure about your eligibility, we recommend booking a free 10 minute consultation call with Omega Accounting, the top-rated ERC service by Merchant Maverick. Omega help businesses reliably claim their COVID support funds from the CARES act.

How much do I get from the ERC?

The ERC’s percent of qualified wages eligible for credit varies between 2020 and 2021 according to the following criteria:

  • For the year 2020, it amounts to 50% of the qualified wages paid to employees, with a maximum limit of $10,000 per employee for all quarters.
  • As for 2021, the ERC stands at 70% of the qualified wages paid to employees, with a maximum limit of $10,000 per employee per quarter.

In 2020, the ERC’s credit maximum was set at $5,000 per employee. Meanwhile, the credit maximum for 2021 was $7,000 per employee.

With the amendments made in 2020, you have the potential to qualify for employee retention tax credits in 2021, which can amount to as much as $28,000 per employee. Additionally, the longer you retain your employees on your payroll, the greater benefits you may be eligible to receive.

For updated information from the IRS, check out this comparison chart of the ERC in 2020 and 2021.

Examples of ERC

Based on the criteria outlined by the IRS, here are examples of the Employee Retention Credit (ERC) for both 2020 and 2021:

2020 Examples:

  1. Example for a small business (less than 100 employees): ABC Restaurant, a small business with 60 employees, experienced a significant decline in revenue due to the COVID-19 pandemic. They were required to partially suspend their operations due to government restrictions. ABC Restaurant continued to pay their employees during the suspension period. The total qualified wages paid to employees during the year amounted to $400,000. As a small business, ABC Restaurant is eligible for the ERC and can claim 50% of the qualified wages, which equals $200,000.
  2. Example for a large business (more than 100 employees): XYZ Manufacturing, a large business with 250 employees, faced a decline in revenue and had to partially suspend operations in 2020 due to the pandemic. They continued to pay employees during the suspension period. The total qualified wages paid to employees during the year amounted to $1,000,000. Since XYZ Manufacturing is considered a large employer in 2020, they can only claim the ERC for wages paid to employees not providing services. Therefore, they can claim 50% of the qualified wages, which equals $500,000.

2021 Examples:

  1. Example for a small business (less than 500 employees): ABC Tech Solutions, a small business with 150 employees, experienced a decline in revenue due to the ongoing COVID-19 pandemic. They retained all their employees and continued to pay them, despite reduced business activity. The total qualified wages paid to employees during the first quarter of 2021 amounted to $200,000. As a small business, ABC Tech Solutions is eligible for the ERC and can claim 70% of the qualified wages, which equals $140,000 for the quarter.
  2. Example for a large business (more than 500 employees): XYZ Hospitality Group, a large business with 800 employees, faced a substantial reduction in business due to the pandemic and had to partially suspend operations. They continued to pay wages to their furloughed employees. The total qualified wages paid to furloughed employees during the second quarter of 2021 amounted to $2,000,000. Since XYZ Hospitality Group is considered a large employer in 2021, they can claim 70% of the qualified wages, which equals $1,400,000 for the quarter.

Please note that these examples are hypothetical and provided for illustrative purposes only. The actual eligibility and calculations for the Employee Retention Credit may vary based on specific circumstances and applicable laws and regulations. It’s advisable to consult with a qualified tax professional or refer to official IRS guidelines for accurate and up-to-date information on the ERC.

Summary

Understanding the intricacies of the Employee Retention Credit (ERC) can be a daunting task for business owners. However, we hope that the examples provided in this article have shed some light on the qualification criteria and potential credit amounts available.

By delving into real-world scenarios and showcasing different scenarios for both 2020 and 2021, we aimed to clarify the eligibility requirements and offer a clearer picture of the benefits that can be obtained.

Remember, the ERC can make a substantial impact on your business’s financial health, providing much-needed relief during these challenging times. As you navigate the complexities of the credit, consult with tax professionals or trusted advisors to ensure you maximize your benefits.

Stay informed, stay proactive, and take advantage of the opportunities available to you. With a firm understanding of the ERC and its potential, you can make informed decisions that benefit both your employees and your bottom line.