Who is Eligible for Employee Retention Credits?

Employers who are looking to take advantage of the employee retention credit (ERC) must meet certain criteria. The ERC was a refundable tax credit intended to help small business owners keep their employees on payroll during the COVID-19 pandemic. The credit is equivalent to 50 percent of the qualifying wages (including qualifying health plan expenses) that an eligible employer pays in a calendar quarter. To be eligible for the ERC, employers must have 100 or fewer full-time employees.

Qualified wages do not include FMLA payments and sick leave wages required under the Families First Coronavirus Response Act, salaries for which the employer requests a credit for paid family medical leave under section 45S, or the salary of an employee of the Work Opportunity Tax Credit. Business owners who weren't recovering startups weren't eligible for the employee retention credit for wages paid after September 31. The credit is fully refundable because the eligible employer can receive a refund if the amount of the credit exceeds certain federal employment taxes owed by the eligible employer. An employer requests the employee retention credit by reducing its payroll tax deposits and reconciling these amounts on the quarterly Form 941. The employee retention credit applies to workers employed full or part time if their employers meet the requirements. If an employee's salary is maintained, but their working hours are reduced, the payment for hours not worked can be used to support a retention 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. The ERC was designed to help small business owners keep their employees on payroll during the COVID-19 pandemic. It is a fully refundable tax credit that is equivalent to 50 percent of qualified wages (including allocable qualified health plan expenses) that eligible employers pay to their employees. For more information and examples, see Determining the maximum amount of an eligible employer's employee retention credit.