Added to federal tax law by the 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and further expanded in 2021, the Employee Retention C redit (ERC) can significantly reduce an employer’s federal employment (payroll) taxes. In addition, ERC generates cash refunds to the extent the ERC exceeds the payroll taxes that were due in the applicable payroll period. Business owners now have 16 more months to amend their 2020 and 2021 payroll tax returns to recognize the ERC.
Employers can use the ERC to offset dollar-for-dollar employer payroll taxes they otherwise must deposit with the IRS. The ERC can offset the employer share of Social Security taxes on wages consisting of 6.2% Old-Age, Survivors and Disability Insurance (OASDI) and 1.45% Hospital Insurance, a potential savings totaling 7.65% of tax otherwise payable. The credit does not affect the employee’s share of required Social Security taxes.
The ERC is “refundable,” meaning that if the available credit exceeds the employer’s liability for eligible payroll taxes, then the credit creates an overpayment for which the employer can obtain a refund from the IRS.
The ERC applies to:
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