What is the Employee Retention Credit?

Introduced in the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), the Employee Retention Credit was created by Congress to encourage employers to keep their employees on the payroll during the months in 2020 affected by the coronavirus pandemic.

When initially introduced, this tax credit was worth 50% of qualified employee wages but limited to $10,000 for any one employee, granting a maximum credit of $5,000 for wages paid from March 13, 2020, to December 31, 2021. It has since been updated, increasing the percentage of qualified wages to 70% for 2021. The per employee wage limit was increased from $10,000 per year to $10,000 per quarter.

The credit is available to all eligible employers of any size that paid qualified wages to their employees, however different rules apply to employers with under 100 employees and under 500 employees for certain portions of 2020 and 2021.

Who is eligible for the Employee Retention Credit?

An eligible employer for the employee retention credit in 2020 is any private-sector employer or tax-exempt organization carrying on a trade or business during calendar year 2020, that either:

fully or partially suspended operations during any calendar quarter due to orders from an appropriate government authority limiting commerce, travel, or group meetings due to COVID-19; or
experienced a significant decline in gross receipts during the calendar quarter.

Eligibility rules have been updated for 2021.

To be considered for the credit, more than a nominal portion of the employer’s business operations must have been suspended. For the purposes of the employee retention credit, a portion of an employer’s business is considered more than a nominal portion of operations if either the gross receipts from that portion of business operations is not less than 10% of gross receipts (determined by same calendar quarter in 2019) or the hours of service performed by employee is that portion of the business is not less than 10% of the total number of hours of service performed by all employees in the employer's business.