Employee Retention Credit

 

ERC or Employee Retention Credit is a tax refund claimed by companies for increasing the wages of an employee before the start of the following year. In general, if an employee receives a net wage or salary increase and so the net salary was lower than that of the previous year, the employer must file an ERC claim with the IRS as stated in IRS Form W-2 for wages and salaries for the employer to be eligible for a refund. The amount of the refund is calculated using an employee’s rate of pay plus a one-half of 1% deduction for Federal Insurance Contributions Act (FICA) and Medicare contributions.

When was ERC first introduced?

The U.S. tax code was amended for the first time in the Tax Reform Act of 1986. A credit for wage increase was among the tax reliefs included in the Act. However, the Act had no effect on the refund ability of ERC for the tax year 1987. As a result, only those employees that had additional wages paid to them before the start of the tax year were entitled to a refund.

What is the general rate of refund ability of ERC?

The general rate of refund ability of ERC is 75 percent. However, there are certain conditions, which, if satisfied, may increase the rate of refund ability.

FICA and Medicare contributions must be paid to employees and a decrease of these rates at any time during the tax year, even before the start of the tax year, is a basis of increased refund ability.

An employee who was born on or before January 1, 1954, is eligible for refund ability in the first year of employment only.

The new ERC rate for this tax year is: $1,080.70 for a full-year employee, $1,059.60 for a part-year employee and $902.90 for a seasonal employee.

If an ERC claim is filed and IRS grants the claim, then the employer must refund an amount equal to the refundable amount. The amount to be refunded is based on the worker’s salary plus the following deduction for FICA and Medicare contributions:

For a full-year employee:

• Amount EROI of $2,950.60 for a full-year employee.

• $0.0725 for FICA for a full-year employee.

• $0.6836 for FICA for a part-year employee.

• $0.2879 for Medicare for a part-year employee.

• $0.0373 for Medicare for a seasonal employee.

• $0.0335 for Medicare for seasonal employee.

• $0.0272 for Medicare for seasonal employee.

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