Understanding the Employee Retention Credit: How is it Paid?

The Employee Retention Credit (ERC) is a refundable tax credit created under the CARES Act to help companies cover the cost of keeping workers employed during the pandemic. It is fully refundable, meaning that eligible employers can receive a refund if the amount of the credit exceeds certain federal employment taxes owed. The amount of the credit is calculated based on a percentage of “qualified wages”, including the attributable qualifying health plan expenses that an eligible employer pays to employees. This includes federal income tax withheld from employees, employee participation in Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes for all employees.

Eligible employers can apply for the ERC retroactively by filing Form 941-X (adjusted federal tax return from the employer or request for reimbursement). Alternatively, employers who file an annual payroll tax return can file an amended return using Form 944-X (employer's adjusted annual federal tax return or request for reimbursement) or Form 943-X (adjusted federal employer tax return for agricultural employees or request for reimbursement). The ERC is a fully refundable tax credit for employers that is equivalent to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay to their employees. It is allowed against employer participation in social security taxes under section 3111 (a) of the Internal Revenue Code (the “Code”) and the portion of taxes imposed on railroad employers under section 3221 (a) of the Railroad Retirement Tax Act (RRTA) that corresponds to social security taxes under section 3111 (a) of the Code.

An eligible employer can reduce their payroll tax deposits during the quarter by the amount of credit expected for the quarter. Due to the complexities of eligibility for the employee retention credit, Thomson Reuters has updated their employee retention credit tool to help all employers determine if they qualify for the credit. There is still time to apply for the ERC retroactively, so it is important to understand how it works and how to apply for it. For more information on how to apply for the refundable employee retention credit, see How to Apply for the Employee Retention Credit.