Employee Retention Credit Basics

October 5, 2022  |  Barton Walter and Krier

Many businesses took hits of all kinds during the COVID-19 pandemic. Under certain circumstances, businesses can benefit from keeping employees on their payroll when their bottom line might suggest otherwise. Keep reading to learn more about Employee Retention Credit basics and how to determine whether your business is eligible to take advantage of these credits. It’s not too late.

Employee Retention Credit Essentials

For the official explanation of the Employee Retention Credit (ERC), we turned to the IRS website. There, ERC is defined as a “refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021.”

There is a $7,000 ceiling on qualified wages (including health care costs) for each employee for all quarters of a calendar year when operations were suspended, or sales declined. So, the credit on qualified wages paid to an employee by an eligible employer is 50 percent of that, or $3,500.

Determining Eligibility for ERC

The ERC runs through Q3 of 2021. To be eligible for the Employee Retention Credit, a business or trade — including tax-exempt organizations — must have operated during the 2020 calendar year. In addition, employers need to meet specific criteria.

First, the enterprise suspended operation — in part or wholly — in any quarter in 2020 by virtue of government orders limiting the basis of the business due to COVID-19 restrictions. This includes prohibited commerce, travel, or group gatherings that affect some but not necessarily all business concerns.

And second, the organization encountered a significant downturn in total revenue in a given quarter. For 2020, receipts must show a 50 percent decrease when compared to the same quarter in 2019. For 2021, sales need only show a 20-percent dip over the same quarter in 2019. In addition, employers who qualify for one quarter automatically qualify for the following quarter. We can provide more details on that.

Employers of any size may claim the ERC. Those who are self-employed are not eligible regarding their own earnings but may qualify based on any employees’ wages.

We Can Answer Your Questions

These Employee Retention Credit basics are just a starting point. The ERC information travels so many avenues and can seem overwhelming, since every situation is different. You may also wonder about thresholds for sales reduction, how to file and the window to do so, amendments and the review process, and so forth. We can answer your questions. Contact the tax professionals at Barton, Walter & Krier today to discuss your business, ERC, and other tax or financial concerns.