Employee Retention Credit Eligibility: What You Should Know

 Employee retention credits are an essential tool employer can use to help keep and motivate their workforce. These credits can reward and incentivize employees to stay with the company and take on additional tasks. They can also help employers improve their recruiting efforts and provide competitive wages. Understanding the ERC eligibility criteria and how to use these tax credits can help employers maximize their benefits. This guide will explain the basics of employee retention credits, the eligibility requirements, and how they can be used.

Eligibility Requirements 

To meet ERC eligibility, employers must meet specific key criteria:

Have an Active Trade or Business

To be eligible, employers must be actively engaged in a trade or business that has been fully or partially suspended due to a COVID-19-related closure order. This means employers must have closed down their operations due to the pandemic. If the business only experienced a slowdown due to COVID-19, they may not qualify. 

Qualified Employees

 Employers must also have employees who worked for at least 90 days before December 31, 2020 and did not provide services during any closure period. To be considered a “qualified employee,” the employee must have been employed for at least 30 hours per week for any pay period in which they were employed. 

Eligible Employees

Employers must have at least 50% of their workforce either remaining employed after February 15, 2020, or recently rehired and started work after being laid off. Employees need to have been under employment for at least 90 days before their terminating job and must have started their new job on or after March 13, 2020, and before June 30, 2021. All eligible employees must have qualified wages of at least $10,000 between March 13 and June 30, 2021.

Payroll Expenses

To be sure of ERC eligibility, the employer must also have paid out paychecks to the qualified employee with payroll expenses comparable to those the employee would have earned before the business suspension. This means that the employer must pay wages that are comparable to the wages they would have provided prior to the suspension, taking into account health insurance, retirement contributions, and other benefits. 

Tax Payments

Employers must also have paid their employment taxes on the wages paid to the qualified employees. They must also not have received a loan under the Paycheck Protection Program for the wages paid to the qualified employees to meet ERC eligibility conditions

Credit Amounts

The maximum credit a business is entitled to receive is $5,000 per eligible employee. However, businesses are limited to the number of wages paid in particular quarter-eligible salaries included in the credit calculation, which must be $10,000 or less per quarter. 

Documentation Requirements

 Employers must maintain records such as payroll, pay stubs, and other documents to support claims. Additionally, employers must fill out Form 5884-C, Employee Retention Credit, to calculate the amount of the credit. 

Timing

The credit is claimed on the quarterly employment tax return. The credit also applies to wages paid between March 13, 2021, and June 30, 2021.