The Employee Retention Tax Credit or ERTC is a refundable tax credit that helps employers keep staff during challenging periods. It was introduced in the CARES Act and later extended by additional legislation.
The ERTC reduces payroll taxes by covering a percentage of wages paid to employees during specific periods. To qualify, employers must meet criteria such as:
A sharp drop in revenue
A full or partial suspension of business due to government orders
How Does the ERTC Work?
Eligibility
Employers must meet requirements such as:
Significant revenue decline
Government-mandated shutdowns due to COVID-19
Qualified Wages
Qualified wages depend on the size of the employer:
100 or fewer full-time employees: All wages paid during the eligible period count
More than 100 full-time employees: Only wages for employees who were not working due to COVID-19 count
Credit Amount
2020: 50 percent of qualified wages, up to $10,000 per employee for the year
2021: 70 percent of qualified wages, up to $10,000 per employee per quarter
Claiming the Credit
Employers can claim the ERTC by:
Reducing payroll tax deposits
Requesting an advance payment from the IRS using Form 7200 if the credit exceeds payroll taxes owed
Interaction with PPP Loans
Employers who received a Paycheck Protection Program loan can still claim the ERTC
The same wages cannot be used for both PPP loan forgiveness and the ERTC
Documentation
Employers should keep records of:
Gross receipts
Government orders
Wages paid to employees
Who is Eligible for the ERTC?
Businesses and organizations operating in 2020 or 2021 may qualify, including:
Private businesses and tax-exempt organizations
Employers with full or partial suspensions due to government orders
Employers with significant revenue drops:
2020: 50 percent decline for any quarter compared to 2019
2021: 20 percent decline for any quarter compared to 2019
Eligibility rules are complex, so it is recommended to consult IRS guidelines or a tax professional.
How to Claim the ERTC
Steps to claim the credit include:
Check Eligibility: Confirm your business qualifies based on revenue or government orders
Calculate Qualified Wages:
Identify wages and health plan expenses during eligible periods
2020: 50 percent of up to $10,000 per employee for the year
2021: 70 percent of up to $10,000 per employee per quarter
Reduce Payroll Tax Deposits: Lower federal income tax withholding and your share of Social Security and Medicare taxes
File Form 941: Report the ERTC on your quarterly tax return
Request Refund or Advance Payment: Use Form 7200 if the credit exceeds payroll taxes owed
Keep Records: Maintain documentation such as gross receipts, government orders, and wage records
Benefits of the ERTC
The ERTC provided significant financial relief by:
Reducing payroll taxes
Helping businesses retain employees during the pandemic
Improving cash flow
Supporting workforce stability
FAQs about Employee Retention Tax Credit
What is the main purpose of the ERTC?
Helps employers retain employees by offering a refundable payroll tax credit during challenging periods
Can businesses claim the ERTC if they received a PPP loan?
Yes, but the same wages cannot be used for both PPP loan forgiveness and the ERTC
Who qualifies for the ERTC?
Businesses with revenue declines or government-ordered shutdowns in 2020 or 2021
How do I calculate qualified wages for the ERTC?
Qualified wages depend on employer size:
100 or fewer employees: All wages count
More than 100 employees: Only wages for employees not working due to COVID-19 count
What records are needed to claim the ERTC?
Gross receipts
Government orders
Wage records
