Employee Retention Tax Credit How to Claim?



The Employee Retention Tax Credit (ERTC) is a tax credit designed to help employers keep their employees on the payroll during the COVID-19 crisis. The ERTC has been extended to the end of 2021 and is available to businesses of all sizes, with certain exceptions.

This article will provide an overview of the credit, as well as instructions on how to claim it:

What is the Employee Retention Tax Credit?

The Employee Retention Credit (ERC) is part of the Coronavirus Aid, Relief, and Economic Security Act (CARES), passed by Congress to provide relief during the coronavirus pandemic. The tax credit encourages businesses that are shut down by with orders from a governmental authority or those experiencing financial hardship due to the pandemic to keep their employees on payroll.

Under the ERC, employers that pay wages after March 12, 2020 and before January 1, 2021 may be eligible for a refundable tax credit up to $5,000 per employee in wages paid during that period. The amount they receive is based on the amount of qualified wages paid over a calendar quarter and can be claimed as part of their quarterly Form 941 filing with the IRS. Additionally, employers that are fully or partially suspended due to imposed COVID-19 limitations may qualify for up to an additional 25% in qualified health plan expenses that were paid or incurred during these traditional quarters.

To determine if you’re eligible or calculate potential credits available under this program you may use IRS’ online calculator at http://www.irs.gov/cares-act-employee-retention-tax-credit.

Who is eligible?

The Employee Retention Tax Credit (ERTC) is a valuable source of refundable tax credits for employers to supplement the wages of employees affected by the economic effects of COVID-19. Eligibility for this tax credit depends on a number of factors, including whether or not the employer’s business has been financially affected by the pandemic or if any employees have been furloughed or laid off as a result.

Eligible employers include those businesses who were fully or partially suspended due to government shutdown orders, and businesses that were unable to operate their normal level of activity due to decreases in gross receipts compared to 2019. Employers whose quarterly gross receipts suffered at least a 20% decrease from 2019 are eligible for the credit, but for certain large employers those gross receipt decreases need to be at least 50%.

In terms of employee eligibility, employees must have been:

  • (1) employed for at least one year as of March 12 2020,
  • (2) whose wages would normally qualify for income taxable withholding withholding (i.e., wages over $118/week and more than $4/hour worked), and
  • (3) retained between March 12 2020 and December 31 2021 can be eligible if they either maintained their employment with no reduction in hours worked or suffered a reduction in their average hours worked given they were limited in amounts available that were equal to what was available at different points during the period comparison within each month.

Those workers who are classified as independent contractors do not qualify.

For more information regarding eligibility criteria and how to claim this credit, refer IRS Publication 245.

Qualifying Wages

When it comes to claiming the Employee Retention Tax Credit (ERTC), any wages you pay to an employee meet the ERTC’s “qualifying wages” criteria if you pay those wages between March 12, 2020 and January 1, 2021.

There are some additional factors you must consider to determine if those wages qualify for the ERTC. Let’s dive deeper and explore what those qualifications are:

Defining Qualified Wages

Under the Employee Retention Tax Credit, businesses must pay qualified wages to their employees in order to claim the credit. To qualify, an employee needs to perform services for your business and receive wages from you during either the quarter the tax credit applies or a prior quarter in the same year. Wages that do not qualify include those paid due to sick or disability leave, non-qualified deferred compensation, severance pay and deferred payments of wages. Employer contributions to defined contribution plans such as 401(k) or 403(b) accounts also do not qualify.

In order for qualified wages to be claimed on the Employee Retention Tax Credit Form 5884-A, they must meet three qualifications:

  • Paid after March 12 and before January 1 of 2021;
  • For an employee that is employed by your business on March 12 and is still employed by you when the payment is made;
  • Reported on Form 941 for each calendar quarter during which it was paid.

Special considerations apply if an employer has multiple locations, uses third party payroll providers or has employees located in different states with varying wage withholding requirements. In those cases, employers should consult a tax advisor familiar with their particular set of circumstances in order to understand how qualified wages are calculated for claiming the Employee Retention Tax Credit.

Calculating Qualified Wages

In order to qualify for the employee retention tax credit, you must be able to calculate your eligible qualified wages and health plan expenses.

Qualified wages are determined based on the average number of employees the employer employed in 2019.

  • For employers who had an average of more than 100 full-time employees in 2019, qualified wages are limited to those paid up to $10,000 per employee during 2020. This limit applies regardless of how much the employee actually earns during that year.
  • On the other hand, qualifying wages for employers with an average of 100 or fewer full-time employees in 2019 are limited to wages earned from March 12th through December 31st, 2020, not exceeding $10,000 per employee over such period.

In addition, employers should include any hourly or scheduled bonuses they paid out during the covered period. If these added up to more than $10,000 per employee during 2020 (or between March 12th and December 31st for employers with an average of 100 or fewer full-time employees in 2019), only the amount which does not exceed $10,000 will qualify as qualified wage costs for purposes of computing the retention tax credit. Partially taxable fringe benefits such as de minimis meals or snacks will not count towards qualified wage costs calculations but they could qualify as a health plan expense if they are treated consistently by organizational policy across all employees throughout their share option plan year.

Claiming the Credit

For eligible employers, the Employee Retention Tax Credit (ERTC) provides an incentive to keep employees on their payroll. The ERTC is available for qualifying wages paid after March 12, 2020, and before January 1, 2021.

This article will provide information on how to claim the credit, including which documentation is needed and how to file the claim.

Filing the Form 941

Employers who are eligible for the Employee Retention Tax Credit (ERTC) must file Form 941 in order to claim the credit. The form is filed quarterly, along with all other employer taxes, and should be filed by the due date of each quarter’s taxes.

When completing Form 941, it is important to note that any amounts designated as ERTC must be separated from other wages and taxes reported on the form. Employers should follow the instructions provided in “Instructions for Form 941” when reporting their quarterly taxes, including properly entering amounts eligible for ERTC.

Once completed, employers should submit their completed Form 941 to the IRS on or before the due date of each quarterly payment period. Doing so ensures that employers receive credit for any qualified wages and associated health plan expenses reported in each quarter’s filing. It is important to note that an employer may not retroactively claim wages paid more than 10 months (or 13 months for certain industries) after December 31, 2020.

Finally, the IRS requires employers to submit detailed summaries of all wages paid during the year deemed eligible for ERTC with their final Form 941 filing of 2021. By doing so, employers ensure that their credits are determined accurately and final payments are adjusted accordingly based upon actual qualifying wages and associated health plan expenses reported per quarter.

How to Claim the Credit

Employers who qualify for the Employee Retention Tax Credit can claim a refundable credit against certain employment taxes equal to 50 percent of qualified wages paid after March 12, 2020, and before January 1, 2021.

Wages eligible for the credit are capped at $10,000 per employee per calendar year. Qualified wages also include qualified health plan expenses allocable to those wages. Self-employed individuals may designate an amount that is equal to its Qualified Health Plan expenses as qualified wages when computing the tax credit. The total amount of the credit is limited to $5,000 for all calendar quarters combined for each employee.

To obtain the Employee Retention Tax Credit, employers must file self-certification form with their applicable IRS filing requirement in order to be eligible. Upon being approved by the IRS Commissioner and filing proof of payment such as Form 941 or Form 1040-ES, employers can then begin taking advantage of this credit and reduce their employment taxes beginning on the first day of occupational activity in 2021.

To ensure tracking accuracy and prevent miscalculation errors during reporting requirements, employers should maintain records regarding their eligible wages or health insurance costs incurred during 2020 (the year they are claiming). Examples of necessary documents could include payroll reports indicating payments made; check stubs; bank deposit slips; cancelled checks; and any other documentation used to pay employees throughout 2020 or health insurance premiums paid incur during this period as well.

Where to Claim the Credit

If you are eligible to take advantage of the employee retention tax credit, you can claim the credit on Internal Revenue Service (IRS) Form 941 and Form 5884. You will need to calculate how much credit you should receive based on your wages that qualify for the credit, as well as your qualification period.

Form 941 is used to report payroll taxes quarterly throughout the year. This form includes the employer-side portion Social Security and Medicare taxes, along with federal income taxes withheld from employee paychecks. If claiming this tax break, be sure you add Line 13a or 13b on Form 941 for “qualified coronavirus-related reduction in hours.” The amount calculated as an employee retention credit is reported as a negative number in either of those lines.

Form 5884 is another component required for this credit and details other categories of allowable expenses such as qualified health plan expenses allocated from employer reimbursements or Health Flexible Spending Arrangements (FSA’s). It can be completed collaboratively between employers and employees based on the number of hours an employee completed during a specific period outlined in IRS regulations.

When filing these forms, include any additional documents detailing how qualifications were determined such as your business’s total receipts. The IRS may review these documents prior to granting this credit so prompt filing is necessary if seeking retroactive credits going back to March 12, 2020.


When claiming the employee retention tax credit it is important to understand the information and documents needed to be able to claim the credit. Knowing what types of documents must be provided to the IRS is critical to making sure that the application process is successful and that you are able to receive all of the benefits associated with the credit.

Let’s take a look at all the documents you will need to provide to the IRS:

Required Documentation

In order to claim the Employee Retention Tax Credit, employers must maintain certain documents as part of their record-keeping. This includes documentation that verifies:

  • Whether the employee was employed by the employer during any calendar quarter in 2020 and 2021;
  • The amount of wages paid to the employee during that period; and
  • Whether the employer’s business was partially or fully suspended in any quarter of 2020 or 2021 due to orders issued by a governmental authority concerning COVID-19.

Acceptable documentation may include payroll tax filings, copies of quarterly wage reports, pay stubs, account statements, bank records, or cancelled checks. In addition, employers must also retain supporting documents outlining how they came to determine eligibility if they were either partially or fully suspended in any quarter of 2020 or 2021 due to orders issued by a governmental authority concerning COVID-19.

Documentation to Support Your Claim

In order to claim the Employee Retention Tax Credit, you must provide documentation to support the amount of wages you are reporting for your eligible employees. This documentation must include records such as:

  • Payroll tax filings reported to the IRS (Forms 941, state income, and unemployment insurance payroll tax returns)
  • Payment receipts
  • Canceled checks
  • Bank Account statements
  • Form 1099 information
  • Third-party payer records (if applicable)

You should also maintain Forms 5884 “Work Opportunity Credit” and 8844 “Empowerment Zone Employment Credit” for each quarter that you have used either credit or any combination. Employers who miss or fail to properly document these components of their claims may be subject to liabilities.


If you are looking for more information on the Employee Retention Tax Credit, there are a variety of free resources available to you. You can find information from the IRS, the Small Business Administration, and other financial experts.

This section will provide more information on the resources available to help you learn more about the Employee Retention Tax Credit and how to claim it:

IRS Resources

If you need help understanding more about the Employee Retention Tax Credit program and how to claim it, the following IRS resources are available for further information.

The Internal Revenue Service (IRS) allows taxpayers to access the necessary forms and guidance to understand and properly utilize the ERTC. Taxpayers can access IRS official instructions on how to fill out their employer tax returns related to ERTC by visiting IRS.gov/Coronavirus under “Recovery Rebate Credit Checks and Economic Impact Payments” or directly accessing Publication 5302 from their website.

Filing these under Notice 2020-23 can assist employers in meeting the eligibility requirements of being a qualified employer, as well as provide them with several tax resources which prospective qualified employers may find useful in claiming this credit such as Publication 5140 and Pub 976, Charitable Contributions Substantiation and Disclosure Requirements.

Additionally, taxpayers may also refer to questions and answers related to specific relief measures by visiting employeeretentioncredit.irs.gov or asking questions through their Coronavirus Tax Relief Questions mailbox [email protected].

State Resources

Many states recognize the economic importance of supporting businesses that maintain employee retention during economic hardships, and different states have implemented various forms of state-funded credits, such as Employee Retention Tax Credits. Employers should explore what credits or other forms of support are available from their state government.

The types of credits and support vary greatly by state, so employers should investigate their local government’s resources to inquire about opportunities for Employee Retention Tax Credits. Research can include contacting the state’s Department of Revenue or Department of Labor, as well as investigating current tax rates. Once employers determine their eligibility, they should obtain an official copy of the detailed credit guidelines and application materials from their respective state government.

State Resources:

  • Department Of Revenue
  • Department Of Labor
  • Tax Rate Research
  • State Tax Code
  • Filing Formats