What is the Employee Retention Credit?

Editorial Team

6 min read
Restaurant servers picking up food orders

The Employee Retention Credit (ERC) is a special IRS provision under the American Rescue Plan that allows financially-distressed small business owners to claim a 50% to 70% payroll tax credit if they take proactive steps to retain their employees.

The IRS provides an explanation of the Employee Retention Credit on this frequently asked questions page. However, keep reading for a quick summary about the ERC, how it works, and why all eligible small business owners should take advantage of this program.

Understanding the Employee Retention Credit

COVID-19 was first reported in the international press at the end of 2019. Within just a few months, this isolated outbreak became a pandemic that forced many businesses to dramatically scale back their operations or shut down completely.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act introduced the original version of the Employee Retention Credit, a business relief provision that provided employers with a refundable 50% payroll tax credit for any qualified wages paid to full-time employees from March 13, 2020 until the end of that year.

This payroll credit basically reduces your business’s tax liability. For example, if you paid one of your full-time employees $10,000 in qualified wages, you’d be eligible for an Employee Retention Credit of $5,000 (or 50% x $10,000) for that fiscal quarter.                                                                                                                             

In 2021, the Employee Retention Credit was extended under the Consolidated Appropriations Act (CAA), with the payroll tax credit jumping to 70% for full-time employees retained in 2021. Using the Employee Retention Credit example from before, the credit would now be $7,000 for the same employee.

The numbers and dates can get confusing, but here are the two key takeaways of qualified wages for Employee Retention Credit:

  • For every full-time employee retained from March 13, 2020 to December 31, 2020, eligible small business owners qualify for up to $5,000 in payroll tax credits.
  • For every full-time employee retained from January 1, 2021 to June 30, 2021, eligible small business owners qualify for up to $14,000 in tax credit relief, or $7,000 for the first and second calendar quarters.

Additionally, the IRS recently extended the 70% ERC to any qualified employer retaining full-time employees between July 1 to December 31, 2021.

Note that the definition of “small business” has also changed under the CAA, going from a threshold of 100 full-time employees to 500 full-time workers.

Employee Retention Credit eligibility requirements

Small business owners qualify for the Employee Retention Credit if they meet the following criteria:

  • You have fewer than 500 full-time employees on your payroll.
  • You were ordered by a government agency to partially or fully shut down during the pandemic – or your revenues declined by 90% or more compared to the same period last year.
  • You continued paying qualified wages to your staff during this full or partial closure. Remember that in addition to direct salaries, health care expenses count as qualified wages.

Note that governmental employers are not eligible for the Employee Retention Credit.

Why apply for the Employee Retention Credit?

Even in a stable economy, small businesses can sometimes struggle to stay afloat. In the wake of a pandemic, however, trying to survive becomes even more challenging, especially when mandates govern how, when, and why your business can operate.

As a small business owner, you miss out on potential sales needed to keep your business running. The true impact of these closures goes much deeper when factoring in the cascading effects of mass layoffs throughout society.

The ERC for small business owners was designed to help prevent widespread layoffs – even as companies closed due to government mandates or diminished consumer demand. Even if your small business isn’t turning a profit, the Employee Retention Credit indirectly provides you with the resources to help keep full-time workers on the payroll.

This is obviously good for your employees, who get to keep their jobs.  And, in addition to tax relief from the IRS, the ERC will help prevent business owners from having to undertake the more expensive and time-consuming process of recruiting, hiring, and training new staff as lockdown restrictions ease.

How to claim the Employee Retention Credit

There is no official application form for the Employee Retention Credit. Instead, it’s something you claim when filing your federal tax returns with the IRS. More specifically, you’ll need to claim this credit when filling out IRS Form 941. Eligible small business owners can also ask for an advance on their tax credit relief by completing IRS Form 7200.

If you’re already accustomed to doing your taxes, claiming the Employee Retention Credit should be relatively straightforward. Speaking with a certified public accountant (CPA) or tax advisor can help simplify the process. During these professional consultations, you might also learn about other small business tax benefits you can claim, including depreciation, amortization, and various local or state business relief programs.

How to retain employees even longer

The Employee Retention Credit was designed to reward those employers who continued paying their workers during the worst of the pandemic. That said, sometimes, receiving a paycheck isn’t enough. In fact, many businesses are now struggling to fill positions as employees leave en masse during the “Great Resignation.”

We’ve written a longer resource on how to hire employees during lean times. A few of these tips are also applicable when it comes to retaining staff.

  • Consider sharing some of the Employee Retention Credit with team members in the form of increased wages or more benefits.
  • Provide more training or career advancement opportunities – again partially paid for with benefits received from the Employee Retention Credit.

Offer flextime or the ability to work remotely. Studies have shown that these types of working arrangements can help boost productivity and employee satisfaction.

Manage payroll, taxes, and more with Clover

Our POS solutions integrate seamlessly with third-party plug-ins from the Clover App Market to help you manage payroll, benefits, taxes, and more. Whether you need help with employee management, scheduling, or payroll administration, there’s an app for that.

To learn more, schedule a free consultation with a Clover Business Consultant today.

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

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