Employee Retention Credit: What Your CAA Needs to Know

How do you claim the credit?

Credit Amount

2020
The Credit for 2020 equals 50% of the qualified wages (including qualified health plan expenses) that an eligible employer paid in a calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for all calendar quarters in 2020 is $10,000. This means that the maximum credit available in 2020 for an individual employee is 50% of $10,000, or $5,000.

For example, if an employer pays an employee $8,000 in qualified wages and health plan expenses in Q2 2020 and $8,000 in qualified wages and health plan expenses in Q3 2020, the employer is eligible for a credit equal to $4,000 in Q2 and $1,000 in Q3. Due to the overall limit of $10,000 on qualified wages per employee for all calendar quarters, an employer can only count $2,000 of the $8,000 in qualified wages and health plan expenses in Q3 when calculating the credit.

2021
The Credit for the applicable calendar quarters of 2021 equals 70% of the qualified wages (including qualified health plan expenses) that an eligible employer pays in each calendar quarter. The maximum amount of qualified wages taken into account with respect to each employee for each calendar quarter in 2021 is $10,000. This means that the maximum credit for qualified wages paid to any employee in Q1 2021 is 70% of $10,000, or $7,000, and for Q2 2021 is 70% of $10,000, or $7,000, for a total of $14,000 over both quarters.

For example, if an employer pays an employee $15,000 in qualified wages in Q1 2021 and $15,000 in qualified wages in Q2 2021, the employer is eligible for a credit equal to $7,000 in Q1 (70% of the $10,000, the maximum amount of qualified wages) and $7,000 in Q2.

Qualified Wages

Qualified wages are generally defined as wages and compensation paid to employees during the period of March 13, 2020 through September 30, 2021 (through December 31, 2021 for recovery startup businesses). This includes qualified health plan expenses that are properly allocable to the wages. A qualified health plan expense means amounts paid or incurred by the employer to provide and maintain a “group health plan” as defined in 26 U.S.C. § 5000(b)(1), but only to the extent that such amounts are excluded from the gross income of employees. IRS Notice 2021-20.

2020
If the employer averaged more than 100 full-time employees in 2019, qualified wages are the wages paid to an employee for time that the employee did not work during the quarter in which the employer is eligible for the Credit. For these employers, an employee’s qualified wages for purposes of calculating the Credit may not exceed what the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.

If the employer averaged 100 or fewer full-time employees in 2019, qualified wages are all wages paid to any employee, regardless of whether the employee worked during any period of economic hardship described in (1) and (2) of the “Are you eligible for the credit?” section. This means that this employer could count all qualified wages paid to all employees during the applicable hardship period, even if certain employees continued to perform work. Note that the employer must still qualify as an eligible employer under the suspension of operations test or the significant decline in gross receipts test.

2021
For 2021, an employer that averaged 500 or fewer full-time employees in 2019 may count all wages paid to any employee, regardless of whether the employee performed any work, towards qualified wages.

Employers with more than 500 average full-time employees in 2019 may count only the wages paid to an employee for the time that the employee did not work due to either (1) a full or partial suspension of operations by order of a governmental authority due to COVID-19, or (2) a significant decline in gross receipts.

For both 2020 and 2021, the amount of qualified wages for which an employer may claim the Employee Retention Credit may not include the amount of emergency sick and family leave wages for which the employer received tax credits under the Families First Coronavirus Response Act.

Claiming the Credit

Employers receive the Employee Retention Credit via an offsetting payroll tax credit against their portion of social security taxes. Eligible employers may have previously reported total qualified wages and the related credits for each calendar quarter on their federal employment tax returns, typically Form 941, Employer’s Quarterly Federal Tax Return. Eligible employers may still claim the Credit on amended payroll tax returns, typically Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return. Eligible employers have until April 15, 2024 to file claims for the 2020 tax filing year, and until April 15, 2025 to file claims for the 2021 tax filing year.

Overpayment and Underpayment by the Employer
If the amount of the Credit an employer receives exceeds the applicable employment taxes the employer owes for any calendar quarter, then the excess amount is considered an overpayment. This overpayment will be used to offset any tax liability owed by the employer. If excess amounts remain after the offset, those amounts are paid directly to the employer as a tax refund and reflected as an overpayment on the employer’s return. An overpayment in this instance could occur if the qualified wages claimed for the Credit in one quarter exceed the eligible employer’s share of social security tax owed for that quarter.

If, instead, the IRS erroneously credits the employer more than the amount allowed under the Credit, the excess amount will be treated as an underpayment of taxes by the employer and the IRS is authorized to assess any portion of the excess as an additional tax liability.

This resource is part of the Community Services Block Grant (CSBG) Legal Training and Technical Assistance (T/TA) Center. It was created by Community Action Program Legal Services, Inc. (CAPLAW) in the performance of the U.S. Department of Health and Human Services, Administration for Children and Families, Office of Community Services Cooperative Agreement – Award Number 90ET0482-03. Any opinion, findings, conclusions, or recommendations expressed in this material are those of the author(s) and do not necessarily reflect the views of the U.S. Department of Health and Human Services, Administration for Children and Families.