If you’re a small business owner, you may be eligible for a payroll tax credit called the employee retention credit (ERC). This refundable tax credit benefits eligible employers that kept employees on the payroll during the COVID-19 pandemic.
If this is the first time you’ve heard of the ERC, you’re not alone. Only 32% of small business owners said they were somewhat familiar with the credit in 2021, according to the National Federation of Independent Business.
Luckily, eligible small businesses can still claim the ERC if they haven’t already. But the rules surrounding the ERC can get complicated.
Below, we’ll walk through what the ERC is and help you determine your eligibility for the credit.
What Is the Employee Retention Credit (ERC)?
The ERC is a refundable tax credit first established in 2020 under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The credit was created to help businesses keep employees on their payroll during the COVID-19 pandemic.
Since then, the credit has gone through a number of changes, including expanded eligibility; it’s now also available to employers who obtained loans under the Paycheck Protection Program (PPP). Most eligible businesses can claim the ERC for wages paid to employees between March 13, 2020 and Sept. 30, 2021.
How much could you stand to receive from the ERC? The amount depends on when you’re eligible to file a claim.
For the 2020 tax year, eligible businesses can receive credit on 50% of qualified wages—up to a maximum of $5,000 per employee—for the period from March 13, 2020 to Dec. 31, 2020. For 2021, the ERC is calculated as 70% of qualified wages, up to a maximum of $7,000 per employee per quarter, for a maximum of $21,000 per employee.
Employee Retention Credit Qualifications
Most employers following the enactment of the American Rescue Plan Act could qualify for the credit. The Consolidated Appropriations Act expanded qualifications for the ERC to include businesses who received a loan under the Paycheck Protection Program (PPP), and borrowers from the initial round of PPP that were initially unable to claim the tax credit.
There are two main factors that determine if you’re qualified for the Employee Retention Credit – and one of these must apply in the calendar quarter in which the employer wishes to use the credit. The two factors are:
- A business which was suspended or needed to reduce business operating hours due to a government issued order. Note: This credit applies for only the portion of the quarter that the business was suspended, not the entire quarter.
- An employer that had a significant decline in gross receipts.
Determining Your ERC Eligibility
There are different requirements for claiming the ERC in 2020 versus 2021, so you’ll need to determine eligibility for each year.
2020 eligibility
You are eligible for the ERC in 2020 if:
- Your business faced full or partial suspension or limitation of operations during any calendar quarter because of governmental orders that limited either commerce, travel, or group meetings due to COVID-19; or
- Your business saw a 50% decline in its gross receipts in Q2, Q3, or Q4 of 2020 as compared to gross receipts in the same calendar quarter in 2019.
2021 eligibility
You are eligible for the ERC in 2021 if:
- Your business faced full or partial suspension or limitation of operations during any calendar quarter because of governmental orders that limited either commerce, travel, or group meetings due to COVID-19; or
- Your business saw a 20% decline in its gross receipts in Q1, Q2, or Q3 of 2021 as compared to gross receipts in the same calendar quarter in 2019
When assessing your eligibility, it can be more straightforward to qualify under the gross receipts test, which uses objective evidence. When qualifying under the full or partial suspension test, your eligibility depends on subjective elements that could be challenged by the IRS.
Another advantage of the gross receipts method is that you’ll also automatically qualify for the ERC in the following quarter. If you qualify under the full or partial suspension test, you will only be eligible for the period of time your business was affected by a government order.
You can read more about what the IRS considers full or partial suspension of operations here (see answers to questions 10 to 22).
The deadline for businesses to file amended returns for Q2, Q3, and Q4 of 2020 is April 15, 2024. Businesses have until April 15, 2025 to file amended returns for all 2021 quarters.
ERC for Recovery Startup Businesses
Recovery startup businesses have extended eligibility for the ERC into Q3 and Q4 of 2021. A recovery startup business is one that:
- Went into business after February 15, 2020.
- Has an average annual gross receipt of less than $1 million.
- Does not meet either the full or partial suspension test or the gross receipts test for the quarter in question.
The maximum ERC for recovery startup businesses is $50,000 for each of Q3 and Q4 in 2021.
Business owners can claim the Employee Retention Credit for previous quarters by filling out the adjusted employment tax return within the set deadlines.
What Are Qualified Wages for the Employee Retention Credit?
Your ERC entitlement is calculated based on “qualified wages.” Qualified wages are any employee wages you’ve paid after March 12, 2020, and before January 1, 2021 that were subject to Social Security and Medicare withholding taxes, plus any health plan expenses that are allocable to those wages.
However, there are some wages that don’t qualify. That includes any wages used to obtain PPP loan forgiveness, or credits or relief received under the Families First Coronavirus Response Act (FFCRA), the American Rescue Plan Act of 2021, and the Work Opportunity Tax Credit (WOTC).
Wages paid to individuals who own more than 50% of the business and to those who are related to the employer, including the employer’s spouse, also don’t qualify.
How to Claim Your Employee Retention Credit in 2022 and 2023
If you are eligible to claim the employee retention credit, you will need to file Form 941-X to adjust your initial filing of Form 941 (Employer’s Quarterly Federal Tax Return). You have up to three years after the date you initially filed Form 941 to file a Form 941-X adjustment.
If you haven’t claimed the ERC yet for your small business, it could be worth determining your eligibility to make a claim. For a detailed look at the 2020 and 2021 ERC requirements and calculations, see the IRS’s comparison chart.
Not sure if your business is eligible to claim the ERC? Speak with your CPA or tax advisor, or a qualified ERC expert, who will be able to guide you through the process.
How to Calculate Your Employee Retention Credit
To calculate your estimated ERC refund, check out online tools like EY’s ERC calculator.
Employee Retention Credit FAQs
Can You Get Both the Employee Retention Credit and Paycheck Protection Program?
The CARES Act stated that any employer receiving a PPP loan was not eligible for the ERC unless the PPP loan was repaid by May 18, 2020. This was later repealed by the Taxpayer Certainty and Disaster Relief Act of 2020, which made recipients of the PPP loans eligible for the ERC. Keep in mind that wages paid with the PPP loan are not considered qualified wages for the credit.
Can I Claim the Employee Retention Credit in 2022?
Yes, you can still claim an employee retention credit on your 2022 taxes and will be able to file until 2024 for 2020 credits. The deadline is April 15, 2024 for employees to file amended returns for Q2, Q3, and Q4 of 2020. The deadline to file amended returns for all 2021 quarters is April 15, 2025.
When Is the Deadline for the Employee Retention Credit?
The end date for the ERC was moved from December 31, 2021 to September 30, 2021. However, you can still retroactively file for it if you’re eligible to receive the ERC.
Is the Employee Retention Credit Considered Taxable Income?
The ERC isn’t considered taxable income for employees, so employees won’t need to pay any additional taxes on their wages covered under the ERC. For employers, the ERC is regarded as a business expense and can be used to offset owed taxes.
Ready to apply for the Employee Retention Credit? Accelerate Tax can help. They specialize in helping businesses maximize their ERC refund.
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I can’t provide a 941 because a firm does my payroll and they are using their employee ID#.
How can you help me with this I’ve been getting the run around for over a year now.
Thank you for reaching out! Do you mean employer ID (EIN)? If so, then why is a firm using their EIN instead of yours? That’s the first issue that needs to be resolved.
business opened July 31, 2021 and paid wages in 3rd and 4th quarter. Are they eligible for ERTC?
Yes – you should review this chart with your accountant or your payroll company.
https://www.irs.gov/newsroom/employee-retention-credit-2020-vs-2021-comparison-chart
If you claimed the credit in 2020 can you claim it again for 2021 assuming you qualify again?
Yes. But make sure you’re not double dipping with any PPP forgiveness you may have received.
Our business is a nonprofit. We pay employee wage taxes but not income tax for the company. Are nonprofits eligible?
Yes, you are. The tax credit is applied to the payroll taxes you owe, not income taxes. Hope that helps!
Hello, I am interested in ERC assistance. I was working with a previous company and we ran into some issues, so they are no longer willing to help me. Please advise if someone can assist.
Hi Lindsay, it’s best to reach out to your CPA or tax advisor for help applying for the ERC. If you’re eligible, you’ll need to file Form 941-X to adjust your initial filing of Form 941 (Employer’s Quarterly Federal Tax Return).
Thanks so much for the information. I hope every small Business gets what they deserve.
You’re welcome!
Thank you, this post was very helpful.
You’re welcome! We’re glad it was helpful.
HOW DO I APPLY?
Hi Wayne, thanks for reaching out! If you’re eligible for the ERC, you will need to file Form 941-X to adjust your initial filing of Form 941 (Employer’s Quarterly Federal Tax Return). If you’re not sure if you’re eligible, you can also work with your CPA or tax advisor.
Thanks great information!
We’re glad you liked it, Brian! Thanks for commenting!
Hi. Thanks for this post. If I’m reading correctly, it looks like any sole proprietor is ineligible for these funds. Is that right?
You are correct. It’s really for employer-owned companies w/ employees. Business owners themselves can’t figure into the calculation.
Thanks
You’re welcome!
Thanks
You’re welcome!
Do you have a phone number or email where I can check for updates? I have received Q1/Q2 But Q3 Q4 did not come (I did receive it for other business 6 month a go).
Hi Austin, you can contact the Taxpayer’s Advocacy Office at the IRS and have a representative work with you on this.
https://www.irs.gov/taxpayer-advocate
How do I know if I can claim?
Your best bet is to contact a payroll service company like Paychex or ADP and ask them to do an analysis for your company. Some of the companies will offer these services for free but will then charge you if you decide to use their services to apply for the credit.
I would like to apply for this. Can you guys help me fill out all paperwork?
Thanks for reaching out, Miguel! To get help filling out the paperwork you can work with your CPA or tax advisor. A qualified ERC expert can also help!
We have applied in February of this year and have still not heard anything? How can we find out where we are in the process? Thank you
Thanks for reaching out, Eileen! You can contact the Taxpayer’s Advocacy Office at the IRS and have a representative work with you on this.
https://www.irs.gov/taxpayer-advocate
Thanks
You’re welcome!
I have a small medical practice, and am a solo practitioner, I am struggling to survive since the pandemic. I would like more information on available money for micro businesses like mine.
Your best bet is to get funding from the State Small Business Credit Initiative. More info here:
https://sba.thehartford.com/media/podcasts/ssbci-2/
Hello,
In June of 2022, we filled Form 941-X adjustment for ERC for the year 2021. This was sent by USPS post to the IRS filing office.
So far we have not received any communication or check from IRS.
How we can track the progress at IRS? Also, is there any way we can track the 941-x adjustment that will be processed?
Any help is appreciated regarding this.
Contact the Taxpayer’s Advocacy Office at the IRS and have a representative work with you on this.
https://www.irs.gov/taxpayer-advocate
We file a LOT of these for clients. The IRS is routinely taking 4-9 months to process the ERC checks. Don’t contact the Taxpayer Advocate!! It’s a waste of time and they’ve said not to contact them. You’ll just spend a long time on hold only to get a “we can’t answer that.”
Our business started operation only in 2020. Accordingly, we are not eligible for both 2020 and 2021. What’s the criteria for 2022?
The rule was expanded for businesses that started after Feb 15 2020. For businesses to qualify for ERTC under the expanded definition, they must have started operations after February 15, 2020, and maintain average gross receipts of $1 million or less.
Thank you
You’re welcome, Mark!
Can Hartford process this on our behalf? If so, what is your fee?
Hi Anne, it’s best to reach out to your CPA or tax advisor for help applying for the ERC. If you’re eligible, you’ll need to file Form 941-X to adjust your initial filing of Form 941 (Employer’s Quarterly Federal Tax Return).
Please let me know how to apply
Thanks for reaching out! If you’re eligible for the ERC, you’ll need to file Form 941-X to adjust your initial filing of Form 941. Your CPA, tax advisor or a qualified ERC expert can help guide you through the process.