The Employee Retention Credit (ERC) is a refundable tax credit available to companies that want to keep their employees on the payroll during the COVID-19 pandemic. This credit was introduced under the CARES Act and encourages businesses to maintain their workforce despite the economic downturn. Qualified wages do not include FMLA payments, sick leave wages, or salaries for which the employer requests a credit for paid family medical leave. The ERC is equivalent to half of an employer's employee income and can be used to reduce payroll tax deposits.
Disaster loan counselors can help businesses understand the complex and confusing ERC and Employee Retention Tax Credit (ERTC) program. To qualify for the ERC, employers must meet certain requirements. First, operations must have been suspended, at least partially, due to a government order related to the COVID-19 pandemic. Second, employers must have paid qualified salaries to their employees.
Third, employers must request the ERC by reducing their payroll tax deposits and reconciling these amounts on Form 941 quarterly. It is important to note that the ERC is fully refundable. This means that even if employees found a job and were paid for it, the company can still receive credit. Additionally, if an employee's salary is maintained but their working hours are reduced, the payment for hours not worked can be used to support a retention credit.
For more information and examples on how to determine the maximum amount of an eligible employer's employee retention credit, please consult with a disaster loan counselor or visit the IRS website.