In an effort to ease the financial burdens experienced by businesses during the COVID-19 pandemic, the US federal government included the Employee Retention Credit in its Coronavirus, Relief, and Economic Security (CARES) Act. The Employee Retention Credit provides businesses with a refundable tax credit based on their full-time employees’ “qualified wages,” which provides the incentive for businesses to keep their employees on their payroll. The guidelines and qualifications for employee retention credits have since been updated for the 2021 calendar year by the Consolidated Appropriations Act and the American Rescue Plan Act.

Employee Retention Credit Overview

Under the CARES Act, employee retention credits allow employers to claim 50% of the qualifying wages paid to employees per quarter between March 12 and December 31, 2020. With the Consolidated Appropriations Act 2021 update, employers can claim 70% of the qualifying wages paid to employees per quarter between January 1, 2021 to June 30, 2021. In March 2021, the American Rescue Plan Act of 2021 further extended the tax credits set up in the Consolidated Appropriations Act through the end of 2021.

Regardless of the year, employers can claim up to $10,000 as “qualified wages” per full-time employee. This means that for each of the eligible 2020 quarters, employers can receive 50% of the $10,000 max, or $5,000 per employee. For 2021, they can receive 70% of the $10,000 max, or $7,000 per employee.

Employee Retention Credit Qualifications

Employers qualify for the employee retention credits if they 1) operated a trade, business, or tax-exempt organization during 2020, and 2) experienced one of the following:

• A full or partial operational shutdown due to government orders/restrictions
• A significant decline in gross receipts (less than 50% of the gross receipts of 2019)

Similarly, employers are eligible to receive these credits during the 2021 calendar year if they 1) operated a trade, business, or tax-exempt organization during 2021, and 2) experienced one of the following:

• A full or partial operational shutdown due to government orders/restrictions
• A significant decline in gross receipts in a 2021 calendar quarter (less than 80% compared to the gross receipts of the same quarter during 2020)

Additionally, the number of actively working employees affects who qualifies for the credit. Under the CARES Act, employers who maintained more than 100 full-time employees in 2019, can only claim the wages of those employees who were still on the payroll but not working in 2020. For 100 or fewer employees, all employees’ wages can be claimed. This number jumped up from 100 to 500 employees under the Consolidated Appropriations Act, with the same criteria for 2021 (“How the Updated Employee Retention Credit Works and How to Get It”).

For more details regarding these qualifications, see “Employee Retention Credit.”

Further Updates on the Employee Retention Credit

Originally, the Consolidated Appropriations Acts extended employers’ ability to claim employee retention credits for qualifying wages between January 1, 2021 and June 30, 2021. The American Rescue Plan Act of 2021 extended the timeline so that employers could claim these credits for qualifying wages paid after June 30, 2021 and before January 1, 2022. The IRS has provided the following links for additional guidance on receiving employee retention credits for wages paid between these dates:

• After March 12, 2020 and before January 1, 2021 – Notice 2021-20 and Notice 2021-49
• After December 31, 2020 and before July 1, 2021 – Notice 2021-23 and Notice 2021-49
• After June 30, 2021 and before January 1, 2022 – Notice 2021-49

Taking Advantage of the Employee Retention Credit

As of August 2021, the Employee Retention Tax Credit is set to expire at the end of year, but employers still have time to claim their tax credits. Employers can either retain the designated amount when they file their quarterly federal taxes, using their Employer’s Quarterly Federal Tax Return, Form 941, or they can request an advance of the Employee Retention Credit using the Advance Payment of Employer Credits Due to COVID-19, Form 7200. For more details on claiming the Employee Retention Credit, see “COVID-19-Related Employee Retention Credits: How to Claim the Employee Retention Credit FAQs.”