Understanding the Employee Retention Credit: Is There a Cap?

The Employee Retention Credit (ERC) was introduced under the CARES Act to provide relief to businesses struggling due to the pandemic. It allowed employers to withhold federal income tax, employee participation in Social Security and Medicare taxes, and the employer's share of Social Security and Medicare taxes for all employees. The credit was applied to their share of the employee's Social Security taxes and was fully refundable. If you have 100 workers or fewer, you can claim the salaries of all employees, whether or not they are working.

Employers who file an annual payroll tax return can file an amended return using Form 944-X or Form 943-X to apply for credits. An eligible employer could reduce their payroll tax deposits during the quarter by the amount of credit expected for the quarter. Due to the complexities of eligibility for the ERC, Thomson Reuters has created a tool to help employers determine if they qualify for the credit. If the amount of the credit exceeded the employer's share of those federal payroll taxes, it was treated as an overpayment and reimbursed to the employer.

The ERC is a program of the federal government and the Internal Revenue Service (IRS). Employers reported the total qualifying wages and the ERC related to COVID-19 on Form 941 for the quarter in which the qualifying wages were paid. For eligibility purposes, a portion of an employer's business is considered greater than a nominal share of operations if its gross revenues are not less than 10% of gross revenues (determined by the same calendar quarter of 2018) or if its hours of service performed by employees are not less than 10% of total hours of service performed by all employees. Business owners who weren't recovering startups weren't eligible for the ERC for wages paid after September 31.The credit was allowed from the employer's share of social security taxes (6.2% rate) and railroad retirement tax on all salaries and compensation paid to all employees during the quarter.

Eligible employers can still apply for the ERC for previous quarters by filing an adjusted employment tax return within the deadline set out in its instructions.