Employee Retention Credit

What to Know About the Employee Retention Credit

Belle Wong

If you’re a small business owner, you may be eligible for a tax credit called the employee retention credit (ERC). This refundable tax credit benefits businesses 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.

Determining Your ERC Eligibility

Employee Retention Credit (ERC)

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).

ERC for Recovery Startup Businesses

ERC Credit

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.

Calculating Your Qualified Wages

Your ERC entitlement is calculated based on “qualified wages.” Qualified wages are any employee wages you’ve paid 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 ERC

If you are 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). 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.

To calculate your estimated ERC refund, check out online tools like EY’s ERC calculator.

Next steps: Interested in more small business marketing tips? Sign up for the Small Biz Ahead newsletter today.

45 Responses to "What to Know About the Employee Retention Credit"
    • Paul Koz | November 17, 2022 at 9:18 am

      business opened July 31, 2021 and paid wages in 3rd and 4th quarter. Are they eligible for ERTC?

    • MARSHALL JOHNSON | October 19, 2022 at 5:04 pm

      If you claimed the credit in 2020 can you claim it again for 2021 assuming you qualify again?

      • Gene Marks | October 21, 2022 at 8:24 am

        Yes. But make sure you’re not double dipping with any PPP forgiveness you may have received.

    • FN | September 19, 2022 at 10:41 am

      Our business is a nonprofit. We pay employee wage taxes but not income tax for the company. Are nonprofits eligible?

      • Gene Marks | September 20, 2022 at 9:07 am

        Yes, you are. The tax credit is applied to the payroll taxes you owe, not income taxes. Hope that helps!

    • Lindsay Wolf Beyer | August 30, 2022 at 11:18 am

      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.

      • Small Biz Ahead | August 30, 2022 at 2:24 pm

        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).

    • International janitorial | August 29, 2022 at 10:01 am

      Thanks so much for the information. I hope every small Business gets what they deserve.

      • Small Biz Ahead | August 29, 2022 at 10:29 am

        You’re welcome!

    • rebecca | August 27, 2022 at 9:19 am

      Thank you, this post was very helpful.

      • Small Biz Ahead | August 29, 2022 at 10:26 am

        You’re welcome! We’re glad it was helpful.

    • WAYNE | August 26, 2022 at 2:00 pm

      HOW DO I APPLY?

      • Small Biz Ahead | August 29, 2022 at 10:37 am

        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.

    • Brian Beach | August 25, 2022 at 6:28 pm

      Thanks great information!

      • Small Biz Ahead | August 26, 2022 at 8:21 am

        We’re glad you liked it, Brian! Thanks for commenting!

    • Shannon M | August 25, 2022 at 3:48 pm

      Hi. Thanks for this post. If I’m reading correctly, it looks like any sole proprietor is ineligible for these funds. Is that right?

      • Gene Marks | August 26, 2022 at 10:16 am

        You are correct. It’s really for employer-owned companies w/ employees. Business owners themselves can’t figure into the calculation.

    • rjones@j6mc.com | August 24, 2022 at 8:12 pm

      Thanks

      • Small Biz Ahead | August 25, 2022 at 8:17 am

        You’re welcome!

    • Philip J Coller | August 24, 2022 at 7:06 pm

      Thanks

      • Small Biz Ahead | August 25, 2022 at 8:17 am

        You’re welcome!

    • Austin | August 24, 2022 at 4:23 pm

      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).

    • Clive Rock | August 24, 2022 at 1:46 pm

      How do I know if I can claim?

      • Gene Marks | August 26, 2022 at 9:35 am

        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.

    • Miguel A Luna | August 24, 2022 at 1:26 pm

      I would like to apply for this. Can you guys help me fill out all paperwork?

      • Small Biz Ahead | August 25, 2022 at 8:30 am

        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!

    • Eileen Butcher | August 24, 2022 at 1:13 pm

      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

      • Gene Marks | August 26, 2022 at 9:36 am

        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

    • Thang Pau | August 24, 2022 at 8:38 am

      Thanks

      • Small Biz Ahead | August 24, 2022 at 8:43 am

        You’re welcome!

    • Dr. Vesta McDowell | August 24, 2022 at 7:50 am

      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.

    • Ajay Singh | August 24, 2022 at 6:26 am

      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.

      • Gene Marks | August 25, 2022 at 8:21 am

        Contact the Taxpayer’s Advocacy Office at the IRS and have a representative work with you on this.
        https://www.irs.gov/taxpayer-advocate

      • joe e | August 25, 2022 at 6:57 pm

        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.”

    • Jane | August 23, 2022 at 10:13 pm

      Our business started operation only in 2020. Accordingly, we are not eligible for both 2020 and 2021. What’s the criteria for 2022?

      • Gene Marks | August 25, 2022 at 8:20 am

        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.

    • Mark Hirsch | August 23, 2022 at 6:33 pm

      Thank you

      • Small Biz Ahead | August 24, 2022 at 8:27 am

        You’re welcome, Mark!

    • Anne Fleischl | August 23, 2022 at 2:38 pm

      Can Hartford process this on our behalf? If so, what is your fee?

      1
      • Small Biz Ahead | August 24, 2022 at 10:32 am

        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).

    • Christina Maddox | August 23, 2022 at 1:51 pm

      Please let me know how to apply

      • Small Biz Ahead | August 24, 2022 at 9:54 am

        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.

Leave a Reply

Disclaimer: Comments are subject to moderation and removal without cause or justification and may take up to 24 hours to be seen in comments. Your email address will not be published. Required fields are marked * Please do not include personal policy information; if you have questions or concerns regarding your policy with The Hartford, please log into your account or you can speak directly to a Customer Service Representative.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.