What Is the Employee Retention Tax Credit (ERTC)?
What is ERTC? The Employee Retention Tax Credit (ERTC)(4) was established as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES)(5) of 2020. It’s a refundable tax credit, which means businesses don’t have to repay these funds. The goal of the act is to encourage businesses to keep their employees on their payroll despite being forced to shut down, even partially, due to Covid-19 regulations or a significant decrease in sales due to the pandemic.
This credit allows businesses to recoup some of the funds used to pay their employees during this time. For instance, employers can apply for a payroll tax refund on 50% of eligible wages (up to $10,000) from March 12, 2020, to December 31, 2020, per employee. For wages accrued during the first three quarters of 2021, employers can request 70% of eligible wages (up to $10,000) per employee per quarter. The combined maximum total employers can receive in ERTC for 2020 and 2021 combined is $26,000 per employee.
How businesses determine eligible wages depends on the size of the company. For ERTC in 2020, small businesses, or employers with fewer than 100 employees, can include all wages paid, including the wages of those who continued to work through the pandemic. Employers with 100 or more employees can only receive a tax credit on the wages of employees who didn’t work due to Covid-19 regulations or a significant drop in sales. For 2021, the definition of small business changes to include companies with fewer than 500 employees.