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Employee Retention Tax Credit

Recovery Startup Business Employee Retention Tax Credit

The Recovery Startup Business Employee Retention Tax Credit is an important and dynamic tool for businesses looking to retain their employees in times of economic uncertainty.


This tax credit provides a way for employers to continue paying wages without sacrificing financial stability, and it has become increasingly attractive as many companies struggle with the effects of the pandemic on their business operations. 

The following will discuss much more about this much-needed assistance program, its potential benefits, eligibility criteria, and how to claim it.

As the pandemic continues to disrupt commerce around the world, governments have responded by introducing various relief measures designed to help struggling individuals and businesses cope with unprecedented challenges.

Among them is the Recovery Startup Business Employee Retention Tax Credit (RSBERTC), which was introduced by Congress in 2020 as part of the Coronavirus Aid Relief Economic Security Act (CARES). It allows eligible employers to receive refunds or credits against payroll taxes equal to 50 percent of qualified wages paid between March 12th, 2020, and January 1st, 2021 up to $10k per employee.

This incentive can be especially beneficial for smaller start-up companies that may not have enough capital reserves or other means available that they can use towards covering employee salaries during economic hardship caused by COVID-19.

Understanding what qualifies companies for this tax credit, how it works, and whether your company might benefit from taking advantage of it are key components when considering options for keeping staff employed while staying financially afloat during difficult times such as these.

Overview of the Credit

The tax credit for recovery and startup businesses to retain employees is an important benefit that can help business owners keep their staff during difficult times. The US government has made it available to eligible employers through a qualified retention credit, so they can be incentivized to bring back or keep people employed who have been affected by the coronavirus pandemic.

This article aims to provide an overview of this critical tax credit and explores how employers can access it and what benefits are included in the program.

First and foremost, the Recovery Start-Up Business Employee Retention Credit (RSBERC) allows some employers to claim 50% of the recoverable payroll tax credit wages paid from March 13th, 2020, through December 31st, 2021 up to $10,000 per employee on each quarterly return filed with the IRS.

Eligible employers must have fewer than 500 full-time equivalent employees between January 1st, 2020, and December 31st, 2021; however certain entities such as governmental organizations, churches, or 501(c)(3) non-profits may be able to qualify even if they employ more than 500 FTEs.

Furthermore, in order to qualify for the RSBERC, employees must not perform services due to lack of work or reduced hours compared with pre-pandemic levels; instead, they must remain employed at least 90 days after rehiring them - either as new hires or after being laid off due to COVID-19 related reasons – but only wages earned between March 13th, 2020 and December 31st, 2021 count towards the total amount claimed under the credit.

To further illustrate these points let us now consider which employers are eligible for this incentive...

Eligible Employers

The recovery startup business employee retention tax credit provides an opportunity for employers to receive a federal tax break and possibly even reimbursements for wages paid during times of economic downturns. A fundamental question is, who qualifies as an eligible employer?

To qualify, the employer must meet certain criteria outlined in the IRS guidance. The primary criterion is that the employer must be operating a trade or business during 2020 or 2021.

This includes any type of organization such as corporations, partnerships, sole proprietorships, non-profits, trusts, estates, and governmental entities. Additionally, they cannot have received assistance through either the Paycheck Protection Program (PPP) or Economic Injury Disaster Loans before applying for this credit.

Furthermore, qualifying employers must demonstrate their operations were negatively impacted by COVID-19 due to orders from an appropriate governmental authority restricting access to work locations or travel restrictions imposed due to health concerns.

Other eligibility requirements include maintaining at least 50% fewer full-time employees than in prior year periods; having gross receipts decline more than 20%; and being unable to operate due to property damage caused by public disturbances related to COVID-19 that occurred during 2020 under specific circumstances outlined in the guidance.

These qualifications are designed so that only those businesses directly affected by pandemic shutdowns will benefit from this incentive program. Eligible employers can use these credits to continue paying qualified wages throughout 2020 and into early 2021 until normal operations resume if applicable.

Qualifying Wages

In order to qualify for the recovery startup business employee retention tax credit, wages must meet certain requirements. The wages must have been paid after March 12th, 2020, and before January 1st, 2021. 

They must also be qualified wages which are defined as wages that would be eligible for a payroll tax credit under section 3111(a) of the Internal Revenue Code (IRC).

This includes all gross wages or net taxable compensation from an employer to an employee less any credits allowable against such taxes imposed by IRC sections 3301 through 3306. Qualified Wages cannot include payments for vacation, holiday pay, dismissal pay, severance pay, sick leave payments, discounts on goods and services provided by the employer, or amounts allocated towards retirement plans.

Furthermore, it is important to note that Qualified Wages are limited to $10K per employee in total during the period beginning on March 12th, 2020, and ending on December 31st, 2020. Any amount over this limit will not be counted when calculating the credit amount.

Additionally, any qualified wages paid to employees who are related parties with respect to their employers are excluded from being considered for qualifying purposes. For example – if you employ your own child then those wages will not count towards determining eligibility for the Recovery Startup Business Employee Retention Tax Credit.

It is essential that businesses understand these qualification requirements when attempting to receive this tax credit so that they can accurately determine how much money they may become eligible for receiving and prepare accordingly. Understanding what qualifies as 'qualified' wages is key to achieving success in obtaining this financial incentive from the government.

Calculating the Credit

After examining the details of qualifying wages, it is wise to understand how to calculate the employee retention tax credit that can be used to aid a struggling business. 

The calculation of the credit will depend on whether or not the employer was fully or partially suspended and if they experienced a decline in gross receipts during any quarter of 2020 compared with 2019.

Below are four key points for calculating an employee retention tax credit:

  • Start early and make sure all necessary paperwork is completed correctly. Gather all relevant documents such as receipts or proof of purchase before submitting your claim.

  • Second, identify which calendar quarters you have been in operation and qualify for this credit based on either having fully or partially suspended operations due to COVID-19 compliance regulations or experiencing a drop in gross receipts by at least 20%.

  • Thirdly, decide what type of wage limit applies (50% Wages Limit vs 80% Wages Limit) depending on ownership status and the amount of suspension/gross receipt decline incurred.

  • Finally, use these figures determined above along with maximums established by IRS guidelines to figure out your available Employee Retention Credit.

  • The credits should then be claimed quarterly on Form 941 - Employer’s Quarterly Federal Tax Return as well as through annual filing via Form 940 – Employer’s Annual Federal Unemployment Insurance Returns when applicable.

    Knowing how much money is owed is essential before attempting to claim them. Staying up-to-date with changing government regulations and understanding the requirements needed to receive these funds allows businesses the opportunity to make informed decisions throughout their recovery process.

    With this knowledge comes power; enough power potentially helps keep afloat even under difficult circumstances such as those caused by COVID-19. Now that employers know how to calculate the credits, next is claiming them for reimbursement purposes.

    Claiming the Credit

    The Internal Revenue Service (IRS) has established several criteria that must be met in order to claim the tax credit. First, the business must have experienced a reduction of more than 20% in either gross receipts or wages paid during any calendar quarter compared to the same calendar quarter in 2019.

    Second, businesses must also provide proof that they had employees on their payrolls before March 12th, 2020, and are still maintaining them as of December 31st, 2020. Third, businesses can only claim employee retention tax credits for up to 500 full-time equivalent employees.

    Businesses will need to fill out IRS Form 941 when filing their quarterly taxes and attach Schedule R which is used for claiming the Employee Retention Credit. Businesses should keep detailed records showing how much was spent per employee in each quarter so that it can be accurately reported on Form 941 when filing quarterly taxes.

    Additionally, businesses may need to submit a certified statement from an independent third party attesting to the accuracy of their calculations related to the claimed credit amount.

    Once all necessary documents have been submitted and verified by the IRS, eligible employers will receive a refundable tax credit equal to 50 percent of qualified wages paid between March 13th, 2020 through January 1st, 2021 capped at $5,000 per employee for each qualifying period.

    Potential Impact on Businesses

    A recovery startup business has the potential to bring a major positive impact on businesses. The new tax credit and employee retention program can have far-reaching implications for companies across industries, both large and small.

    To begin with, this type of initiative may result in increased economic activity as it incentivizes employees to stay with their current employers or seek employment in other sectors. 

    Additionally, the new law would provide financial stability to businesses by offering them a tax break that could be used to offset payroll costs associated with hiring new staff members and/or maintaining existing ones.

    Furthermore, providing incentives for businesses to retain workers may create more job security amidst turbulent times which can lead to better morale among employees—and consequently improved productivity within organizations.

    This newfound sense of stability is also likely to benefit customers who will likely experience an increase in service quality due to improved employee satisfaction levels.

    Finally, such initiatives offer potential benefits not just from a financial standpoint but from an ethical one as well; since many individuals are struggling financially during these uncertain times, helping those most affected by the pandemic regain some semblance of stability can go a long way towards restoring confidence in the economy at large.


    The Recovery Startup Business Employee Retention Tax Credit is a valuable opportunity for eligible employers to benefit from significant savings. This credit was created as part of the Coronavirus Aid, Relief and Economic Security Act (CARES) to encourage businesses to keep employees on their payroll during this difficult time.

    To be eligible for the credit, employers must have been in operation prior to February 15th, 2020, and experienced either full or partial suspension due to governmental orders related to COVID-19 or at least a 50% decline in gross receipts compared with 2019.

    Qualifying wages are limited to $10,000 per employee per calendar quarter in order for employers to receive the greatest amount of tax credits available. When calculating the tax credit, it is important that total wages paid before March 12th, 2020 are excluded so as not to double count them.

    The impact of this program can result in hundreds of thousands of dollars in potential tax credits which could significantly improve a business’s cash flow over several quarters.

    Interesting Fact: According to recent research conducted by the SBA Office of Advocacy, small businesses comprise 48 percent of US employment but account for only 7 percent of total revenues generated by all firms - making them particularly vulnerable during times of economic downturns such as those caused by Covid-19.

    As such, programs like the Recovery Startup Business Employee Retention Tax Credit are essential tools for helping these firms remain viable and sustain jobs within their communities.

    This tax credit presents an attractive option for qualified employers looking for ways to retain staff without putting themselves at financial risk; however, navigating eligibility requirements and calculating potential benefits can be challenging even for more seasoned business owners.

    It is therefore advisable that applicants seek professional guidance when determining whether they qualify and how best to utilize this program’s benefits.

    Doing so will help ensure that businesses maximize their opportunities while minimizing compliance risks associated with claiming the credit incorrectly or inappropriately – ultimately leading them towards successful recovery efforts both now and into the future.