The Employee Retention Tax Credit (ERTC) is a refundable payroll tax credit established under the CARES Act in March 2020 to help businesses keep employees on payroll during the COVID-19 pandemic. It was designed to provide financial relief to employers who experienced significant revenue declines or were subject to government-mandated shutdowns, offsetting a portion of qualified wages paid to employees.
Eligible employers could claim a credit of up to 50% of qualified wages in 2020 (capped at $10,000 per employee annually) and up to 70% in 2021 (capped at $10,000 per employee per quarter). For example, a restaurant forced to close dining rooms in Q2 2021 could claim up to $7,000 per employee for that quarter. The credit applied to wages, health insurance costs, and certain qualified expenses, providing crucial cash flow relief during unprecedented disruption.
The ERTC matters because it provided critical financial support that helped millions of businesses avoid layoffs during the pandemic's economic shock. According to the U.S. Treasury, eligible employers claimed over $50 billion in ERTC funds through 2021, directly supporting workforce retention when unemployment spiked. This tax credit served as a bridge, enabling companies to maintain payroll continuity, preserve institutional knowledge, and avoid the significant costs associated with rehiring and retraining. For HR teams, understanding ERTC eligibility and maximizing claims became essential to organizational survival and employee security during crisis periods.
- Determine Eligibility: Verify your organization meets ERTC criteria—either experienced a significant decline in gross receipts (50% in 2020, 20% in 2021 compared to the same quarter in 2019) or was subject to full or partial suspension of operations due to government orders related to COVID-19.
- Identify Qualified Wages: Calculate which wages qualify based on your average full-time employee count. Businesses with 100 or fewer employees in 2020 (500 or fewer in 2021) could claim all wages; larger employers could only claim wages paid to employees not providing services.
- Calculate the Credit Amount: Multiply qualified wages by the applicable percentage (50% for 2020, 70% for 2021) up to the statutory caps per employee per period, including allocable health plan expenses.
- File and Claim: Report the credit on Form 941 (quarterly federal tax return) or file Form 941-X to amend prior returns retroactively, ensuring proper documentation of eligibility and wage calculations is maintained.
Key Statistics & Benchmarks
- $50+ billion claimed — Total ERTC funds accessed by U.S. employers through 2021 per Treasury data.
- 70% credit rate in 2021 — Maximum percentage of qualified wages eligible for credit in later program periods.
- $7,000 per employee per quarter — Maximum credit available in 2021 for eligible businesses.
- Program ended September 30, 2021 — ERTC ceased for most employers, though retroactive claims remained possible through statute of limitations.
Common Mistakes to Avoid
- Double-Dipping with PPP: Employers cannot claim ERTC on wages paid with forgiven PPP loan proceeds; careful allocation is required.
- Misclassifying Qualified Wages: Incorrectly determining which wages qualify based on employee count thresholds leads to improper claims and potential audits.
- Missing Retroactive Opportunities: Failing to file amended returns (941-X) for eligible prior quarters leaves significant refundable credits unclaimed.
Frequently Asked Questions
What is the Employee Retention Tax Credit (ERTC)?
The Employee Retention Tax Credit (ERTC) is a refundable federal payroll tax credit created to incentivize businesses to keep employees on payroll during COVID-19. Eligible employers could claim 50% of qualified wages in 2020 and 70% in 2021, up to statutory caps per employee, providing direct cash flow relief during periods of revenue decline or operational suspension.
How do you calculate the ERTC?
To calculate ERTC, first determine qualified wages based on your employee count threshold. Multiply those wages (including allocable health plan costs) by 50% for 2020 or 70% for 2021. Apply the caps: $10,000 per employee annually in 2020 ($5,000 max credit) or $10,000 per employee per quarter in 2021 ($7,000 max credit per quarter).
Can you claim both PPP and ERTC?
Yes, but not for the same wages. Initially, businesses receiving PPP loans were ineligible for ERTC, but the Consolidated Appropriations Act of 2021 changed this. Employers can now claim both, provided wages used for PPP loan forgiveness are not also used to calculate the ERTC. Careful wage allocation and documentation are essential to avoid compliance issues.
Is the ERTC still available in 2024?
The ERTC program ended September 30, 2021, for most employers (December 31, 2021, for recovery startup businesses). However, eligible employers can still file retroactive claims by submitting amended Form 941-X returns within the statute of limitations—generally three years from the original filing date. Businesses should consult tax professionals to assess eligibility and maximize unclaimed credits.