What is the Maximum Employee Retention Credit?

The Employee Retention Credit (ERC) has provided crucial tax relief for businesses impacted by the pandemic. However, there are limits on how much of this refundable credit companies can claim retroactively on their payroll tax returns.

Understanding the maximum amounts, caps, and limitations allows businesses to benefit fully from the ERC while ensuring proper compliance.

Maximum Credit Amount Per Employee

The maximum ERC that can be claimed per employee is:

  • $5,000 in 2020
  • $7,000 per quarter in 2021
  • Total of $14,000 in 2020 + 2021 combined

In 2020, the credit was limited to 50% of up to $10,000 in wages per employee for the full year. For 2021, this increased to a 70% credit on up to $10,000 per quarter.

Limits Based on Number of Quarters

The ERC was available from the enactment of the CARES Act in March 2020 through September 2021 when it expired, covering 7 potential quarters:

  • 2020 Quarters 2, 3, 4
  • 2021 Quarters 1, 2, 3
  • Total possible credit of $26,000 per employee

However, each employer could only claim the credit for quarters they qualified based on revenue declines or shutdowns. So the maximum per employee depends on eligible quarters.

Quarterly Qualified Wage Limits

Additionally, qualified wages eligible for the credit are capped each quarter.

For 2020, the maximum qualified wages per employee per quarter were limited to:

  • $10,000 for quarters 2 and 3
  • $10,000 for quarters 4

For 2021, the caps were:

  • $10,000 for quarters 1, 2 and 3
  • $10,000 for quarter 4

So the credit cannot exceed 50% of these quarterly wage limits.

Credit Rate Differences in 2020 vs. 2021

Another factor limiting amounts is the credit rate differed between 2020 and 2021 based on number of employees:

2020 Rates

  • 50% of up to $10,000 in wages per quarter for employers with 100 or fewer full-time employees
  • 50% of up to $10,000 in wages per quarter for employers with 100+ employees for just Q3 and Q4 2020

2021 Rates

  • 70% of up to $10,000 in wages per quarter, for employers with 500 or fewer full-time employees
  • 70% of up to $10,000 in wages per quarter, for employers with 500+ employees for just Q3 and Q4 2021

These rates set the maximum credit amounts.

Limitations on Health Plan Expenses

Qualified health plan expenses for employees are also eligible for the ERC, subject to limits:

  • For 2020, the maximum amount of the credit attributable to health expenses could not exceed the average cost of providing group health plan coverage
  • For 2021, the limit was increased to cover the entire health insurance cost for each employee

So in 2021, health expenses expanded the possible maximum further.

Impact of PPP Loan Receipt

Notably, employers who received Paycheck Protection Program (PPP) loans can still qualify for the maximum ERC amounts based on any wages not paid for with their PPP loan. The two programs can complement each other.

Claiming the Maximum Credit

To maximize ERC claims, employers should:

  • Carefully determine quarters of eligibility based on revenue declines or shutdown orders. Document support for these determinations.
  • Track qualified wages and health plan expenses by employee and quarter. Wages above caps do not further increase credits.
  • Take advantage of the 70% credit rate in 2021 vs. 50% in 2020 through proper quarterly calculations.
  • File forms and amendments promptly to claim credits for prior quarters before expiration.
  • Review any potential overlap with PPP loans. Wages used for forgiveness cannot count for ERC.
  • Develop schedules and projections to estimate potential maximum credits by an employee.
  • Discuss increasing 401(k) plan matching to augment qualified wages if taxable wages are nearing the cap.

Common Reduction Factors

Some common reasons the maximum credit amounts may be reduced include:

  • Failure to meet revenue decline tests for all quarters of the program
  • Receiving PPP loan forgiveness for the same wages used to claim ERC
  • Paying wages in excess of the $10,000 per employee limit each quarter
  • Not filing amendments to claim credits for prior quarters before expiration
  • Exclusion of qualified health plan expenses from ERC calculations
  • Inability to carry back the credit prior to 2020 for employers not impacted by COVID until 2021

Conclusion

While up to $26,000 per employee is possible, certain factors can affect the maximum amount received for some employers. Strategic planning to maximize quarters of eligibility and managing within taxable wage caps are key to optimizing the ERC amount received.

Consult a tax professional to ensure you claim the maximum ERC amount you are entitled to. They can explain the qualification criteria, model different scenarios for credit optimization, ensure proper documentation, and avoid mistakes like PPP overlaps.

Frequently Asked Questions:

What is the maximum ERC amount per employee?

The maximum total credit per employee is $14,000, combining 2020 and 2021 eligibility. Up to $26,000 was theoretically possible.

How is the maximum ERC calculated?

It factors in eligible quarters, taxable wage limits per quarter, credit rate percentages, and reduction for any PPP loan overlap.

What is the credit rate and wage limit per quarter?

The credit rate increased from 50% of $10,000 wages in 2020 to 70% of $10,000 wages per quarter in 2021.

Can I claim the maximum for all employees?

Each employee’s maximum depends on their individual wage levels and quarters worked. $14,000 applied only if eligible for all quarters.

What if an employee earned over the wage limit?

Wages above the $10,000 per employee quarterly threshold did not generate any additional credit. This effectively reduced the maximum.

Could I claim the ERC retroactively?

Yes, but deadlines applied for amending prior quarter returns to claim credits. Acting before expiration was key to maximizing retroactive amounts.

How does the PPP loan interaction work?

Wages used to qualify for PPP loan forgiveness could not also be used to calculate ERC credits. This lowered maximums if PPP loans were received.

What documentation should I maintain?

Detailed wage and tax records by quarter are necessary to support the maximum credit claimed per employee.

Who can help me maximize the credit?

Engaging a tax professional can help maximize credits through planning, documentation, proper filings, and ensuring opportunities are not missed.

Where can I get more information?

The IRS website provides guidance on ERC eligibility, calculations, and claiming procedures. Consulting a CPA can also provide expertise.

Resources on Maximizing the ERC

IRS Guidance

Professional Guidance

Government Resources

Note:

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