What is the Purpose of the Employee Retention Credit?



The Employee Retention Credit is a payroll tax credit available to eligible employers that are impacted by the COVID-19 pandemic and related economic events. The Employee Retention Credit applies to all employers, regardless of size, including those who are self-employed and non-profits.

The purpose of the Employee Retention Credit is to encourage businesses to maintain their workforce during difficult economic times. The credit offers financial assistance in two different ways: it reduces the eligible employer’s payroll taxes on employee wages, and increases their total payment when they file employment taxes. The Employer Retention Credit can be taken in full or partial payments at the time the employer files their federal employment tax returns (Form 941), meaning it can reduce an employer’s potential tax liability or even create a refundable credit.

By providing this incentive to businesses, the government encourages them to keep their workers employed while they navigate difficult financial situations brought on by the novel coronavirus pandemics. This also encourages businesses to continue providing benefits, wages and health insurance for employees who may otherwise be laid off due to reduced customer demand or other related business losses from Coronavirus events.

Overview of the Employee Retention Credit

The Employee Retention Credit is a federal tax credit that is designed to help businesses and organizations retain employees during the COVID-19 pandemic. This credit is available to employers of all sizes and can help offset the cost of providing health insurance to employees during this difficult time.

Let’s explore the details of the Employee Retention Credit and see what it can do for your business.

Eligibility Requirements

The Employee Retention Credit is a refundable tax credit designed to encourage employers to keep employees on their payroll despite the economic hardship caused by the Coronavirus Disease 2019 (COVID-19) pandemic. The credit is equal to 50 percent of up to $10,000 in wages paid by an eligible employer whose business has been financially impacted by COVID-19. This Tax-Guidance outlines the details of eligibility criteria, qualifying wages, and allowed uses of funds.

Eligibility Requirements: To be eligible for the Employee Retention Credit, employers must meet one of the following criteria:

  • The business was fully or partially suspended during any calendar quarter in 2020 due to government orders related to COVID-19; OR
  • The business experienced a significant decline in gross receipts during any calendar quarter in 2020 compared with the same quarter in 2019.

Additionally, all employers claiming the credit must meet all applicable requirements established by The Coronavirus Aid, Recovery and Economic Security (CARES Act).

Amount of Credit

The Employee Retention Credit is a dollar-for-dollar credit against a business’s payroll taxes, up to $5,000 per employee. A business may claim the Employee Retention Credit for wages paid after March 12, 2020 and before January 1, 2021. Eligible employers can claim the full amount of qualified wages paid to any employee – up to $5,000 in total – even when two or more eligible employers are associated with one another as defined in section 414(b), (c), (m) or (o) of the Internal Revenue Code. The credit generally equals 50% of qualified wages paid to an employee after March 12, 2020 and before January 1, 2021. However, the employer portion of certain types of payroll taxes are not eligible for this credit.

Qualified wages that may be subject to the Employee Retention Credit include amounts an employer pays for:

  • Employee salaries, wages and other payments
  • Group health care costs including insurance premiums
  • Retirement plan costs such as 401(k) contributions
  • Vacation pay provided in accordance with a written plan or agreement
  • Sick pay mandated by applicable law or provided for under applicable COVID19 leave legislation

How to Claim the Credit

The Employee Retention Credit (ERC) was created through the CARES Act of 2020 and is currently available to eligible employers who have been financially impacted by the COVID-19 pandemic. This credit is refundable for relief payments and is calculated by multiplying the wages paid by a percentage based on certain factors. To claim the Employee Retention Credit, eligible employers would file an IRS Form 941, but must meet all requirements in order to qualify.

To be eligible for this credit, an employer must have either:

  • A full or partial suspension of their business operations due to orders from a governmental authority limiting commerce, travel or group meetings; or
  • They are experiencing gross receipts that are less than 50 percent of the same quarter in 2019.

Eligible wages used to calculate the credit must be paid between March 13, 2020 and December 31, 2020 and are limited to $10,000 per employee.

In addition, employers will need to provide recipients with an approved certification for each quarter where they plan on taking advantage of this credit as well as record keeping requirements such as information about employees’ wages and how much tax liability was deferred through use of this credit. Employers should also consult with their accountant before claiming any credits related to ERC usage.

Benefits of the Employee Retention Credit

The Employee Retention Credit is a tax credit designed to assist businesses affected by the COVID-19 pandemic. It is meant to incentivize employers to keep their employees on the payroll. The credit can be taken against the employer’s portion of Social Security tax.

Let’s take a look at the benefits of taking advantage of the the Employee Retention Credit:

Cost Savings

One of the primary benefits of the Employee Retention Credit is the cost savings it provides for employers. By taking advantage of this credit, employers can reduce their quarterly payroll tax liability and put more money back into their business operations. This makes it much easier for employers to manage cash flow during difficult economic times or when faced with other unforeseen expenses. The credit also provides a tax incentive for employers to retain their employees and help protect them from potential layoffs or financial hardship due to COVID-19.

The Employee Retention Credit can offset up to 50% of an employer’s wages for each employee, until December 31, 2020. To be eligible for the full credit amount, wages must be paid between March 12, 2020 and December 31, 2020. Wages above 12 weeks are eligible as well; however, only 20% of these wages may be used as a basis for the credit calculation. Employers who pay wages after December 31 may still be eligible depending on when they submit a Form 941x adjustment application with the IRS.

Additionally, employers who are using PPP Loan Funds or are under special pandemic coverage orders may still qualify for this Employee Retention Credit by reducing their PPP Loan forgiveness amount by any qualified retention credits obtained prior to submitting a request for loan forgiveness on Form 3508 loans submitted through June 30th.

In order to benefit from the Employee Retention Credit, employers must complete certain steps by qualifying and claiming these credits in an accurate and timely manner. While it is important to understand all requirements associated with these credits in order to obtain them, many small businesses have found them extremely beneficial in managing their finances while they recover from the effects of COVID-19 related closures or suspensions of operations. Employers should remain up-to-date on all federal regulations pertaining to this credit in order to ensure that they are taking advantage of all available savings opportunities related to employee retention costs during these unprecedented times.

Increased Employee Retention

The Employee Retention Credit (ERC) is a refundable tax credit for employers to incentivize businesses to keep employees on their payroll throughout the COVID-19 pandemic. The maximum credit available under this program is $5,000 per employee, and businesses may be eligible if they experience a full or partial suspension of operations due to governmental orders or have experienced at least a 50% reduction in gross receipts when compared to the same quarter in 2019.

Providing employers with an incentive to retain their employees during difficult economic times, this tax credit has helped many companies maintain viable business operations despite significant challenges. The ERC helps employers recover and stay afloat while keeping employees while preventing job losses due to the economic downturn. Additionally, it allows businesses that have seen a decline in revenue or customers during the pandemic to recover faster without experiencing the negative impacts of layoffs or furloughs.

Employee retention credits are an important tool for safeguarding workers by subsidizing a portion of their wages and limiting consequential financial hardship for both individual workers and businesses as a whole. In addition, since wages paid with ERCs do not count towards an employee’s Social Security wage base, more workers will benefit from larger Social Security benefits after retirement. Ultimately, this means that both businesses and employees can reap long-term rewards from taking advantage of this program.


The Employee Retention Credit is a valuable tax credit for employers in businesses negatively impacted by the coronavirus pandemic. This credit allows businesses to claim a portion of the amount spent on qualified wages, which can help reduce their payroll taxes and provide financial relief.

To be eligible for this credit, employers must have experienced either a significant revenue decline due to the pandemic or operate in certain shutdowns. Employers should review their records to determine if they qualify for this credit and should consult their tax advisor for further guidance on how to take advantage of it.