Employee Retention Credit: What Qualifies and How to Apply

The Employee Retention Credit (ERC) is a refundable tax credit designed to help small businesses keep their employees on payroll during the COVID-19 pandemic. The credit is equal to 50% of qualified wages, including allocable qualified health plan expenses, that eligible employers pay to their employees. The IRS has protective measures in place to prevent wage increases from being counted for the credit once the employer is eligible to receive the ERC. The notice includes guidance on how employers who received a Paycheck Protection Program (PPP) loan can retroactively apply for the employee retention credit.

To be eligible for the ERC, employers must have more than 100 full-time employees and must use the qualified salaries of employees who do not provide services due to the suspension or decline of business activity. The law increased the employee limit to 500 to determine what salaries are applicable to the credit. Employers who receive an employee retention credit cannot deduct the portion of the salary paid, including allocable health care costs, equal to the credit. An employer requests the employee retention credit by reducing its payroll tax deposits and reconciling these amounts on the quarterly Form 941. While the Employee Retention Tax Credit (ERTC) program has officially expired, this does not affect a company's ability to apply for the ERTC retroactively.

For more information and examples, see Determining the maximum amount of an eligible employer's employee retention credit.