What is the Employee Retention Tax Credit? A Guide for 2024

 

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Did your small business keep employees on your payroll through the pandemic? Congratulations! You may be eligible for a tax credit from the Internal Revenue Service.

The Employee Retention Credit, referred to as the ERTC or the ERC, was first launched in the early days of the COVID-19 pandemic as part of the CARES Act relief package. It was intended as an extra incentive for smaller businesses to retain their employees, although the Payment Protection Program widely overshadowed it.

The ERC is still available retroactively for both 2020 and 2021, but 2024 deadlines are quickly approaching.

Just want to know if you qualify? Get started here

Key Points:

The ERC is a pandemic relief tax credit that gives qualifying businesses up to $26,000 per W-2 employee.

Even though it is termed a tax credit, you can get paid in excess of what you’ve paid in taxes.

Businesses that received PPP loans are eligible for the ERC too.

Businesses have until April 2024 to amend their 2020 tax filing and until April 2025 to amend their 2021 filing to apply for the ERC.

Given the time it takes to gather the necessary documentation and process a claim, businesses looking to meet the April 2024 deadline should start the application process in Q1 of 2024.

Just want to know if you qualify? Get started here.

What Is the employee retention credit?

In this video, Jazmine covers the basics of the ERC including what it is, how to qualify, how much you could claim, and where to get started.

What is the Employee Retention Credit?

The Employee Retention Credit is a refundable tax credit intended to encourage businesses to continue to pay employees throughout government shutdowns during the COVID-19 pandemic.

CARES Act – 2020

The Employee Retention Credit was first introduced as part of the Coronavirus, Aid, Relief, and Economic Security Act (CARES Act) in 2020. The act permitted qualifying businesses to claim 50% of qualifying wages up to $10,000 per employee paid from March 13 through Dec. 31.

Consolidated Appropriations Act – 2021

The Employee Retention Credit was updated in 2021 to allow qualifying employers to claim 70% of qualifying wages up to $10,000 per quarter in 2021.

American Rescue Plan Act – 2021

This act added recovery startup businesses who started their business on or after Feb. 15, 2020, as eligible businesses if their annual gross receipts didn’t exceed $1 million in 2020 or 2021 and they had more than one or more W-2 employees excluding family members.

Infrastructure Investment And Jobs Act – 2021

This act terminated the ERC credit for the 4th quarter of 2021 except for recovery startup businesses.

How the ERC works.

The Employee Retention Credit is a refundable tax credit for qualifying employee wages. The credit is based on payroll taxes rather than income taxes, so you can still receive the credit even if you paid no income taxes in 2020 or 2021.

The best part is because it is refundable, it’s possible to receive money back beyond what you originally paid in payroll taxes. So if you qualify for $50,000 under the ERC, but only paid $10,000 in payroll taxes, you would still receive the full $50,000 refund from the IRS. Bear in mind there is a small non-refundable portion of the ERC that is limited to the amount you actually paid in employee Social Security and Medicare taxes.

How much money will my small business get from the ERC?

For tax year 2020, eligible small businesses can claim 50% of the first $10,000 in wages per employee through the Employee Retention Credit. This adds up to a maximum of $5,000 per worker, and you can apply for this credit now in 2023.

For the first 3 quarters of 2021, eligible small businesses can claim up to 70% of the first $10,000 in wages per quarter for each employee. This amounts to $21,000 per employee.