*The IRS has stopped processing new Employee Retention Tax Credit (ERTC) claims for the time being. For more information, visit IRS.gov.
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.
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.
View Comments (80)
I just need to know the total fees for preparing and processing for my company's ERC?
Fees are based on who you use to help you. Please reach out to your accountant or payroll service.
I have a client who bought an existing company at the end of 2021 (in full). Can they file for the back periods if they qualify? Normally requires that the returns be amended for that period (year 2020 or 2021) but the K-1s would have been issued to the old owners? How is this handled?
This depends on the nature of the acquisition. If stock was purchased and the entity carries on then yes you could go back and apply. But if just assets were purchased and a new entity was created probably not. You’ll need to discuss the specific facts about this situation with a financial or tax professional.
Should I amend my 2020 and 2021 FORM 1040, because I did receive ERC for those years? I'm self employed and have three employees.
The ERTC doesn't have to do with your 1040. It’s a payroll tax credit so you would need to amend your 941 returns for the applicable quarter where you’re eligible. You should talk to a financial or tax professional to do this.
We are a dental office. During the pandemic, we received financial help from insurance companies that we provide services for, and grants from the state and local programs. Are these to be included in gross receipts? Our normal receipts only come from treatments we provide to our patients.
This is a great question because normally grants are taxable for federal purposes. But state laws may vary. Also, most COVID grants from governments are not taxable, but that depends. If you received financial help from an insurance company in the form of cash contributions then it’s very possible that it's taxable. You should talk to your accountant and also the insurance company as they may be able to provide guidance, assuming that they were giving similar help to others who likely had the same question.
My employees are both of my brothers. One has worked for me for over 25 years, the other for over 10. Are there any exceptions to the employees being related to you?
It seems so unfair.
Sorry. Compensation to related employees cannot be taken into account. This includes:
A child or a descendant of a child;
A brother, sister, stepbrother, or stepsister;
The father or mother, or an ancestor of either;
A stepfather or stepmother;
A niece or nephew;
An aunt or uncle;
A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
I have spoken with my account and I am qualified. Now what is the next step with The Hartford?
Hi Michelle, you can apply for the Employee Retention Credit with Accelerate Tax. They specialize in helping businesses maximize their ERC refund. This is their website: https://thehartford.webflow.io/?utm_campaign=ERC_What_2_know_Page
Hello, How do you apply for ERTC credits?
You do so by amending the federal 941 tax return for the quarter where you’re eligible. This is not simple so my recommendation is that you talk to an accountant or a good payroll service to first see if you’re eligible and then to do the amended form.
We do not qualify for the ERC, according to our CPA because we had an increase in business during the pandemic, being a retail meat shop. We are, however, hearing advertisements that state that even if we had an increase we can qualify. Is this just a ploy to get a call into them?
There are 2 qualifications for eligibility:
-a DECREASE in revenues (doesn’t look like you qualify)
-a full or partial shutdown during COVID. If you had to go through a lockdown for any period of time then you may qualify. Don’t respond to those ads. Talk to a reputable CPA or payroll service company that can determine if you’re eligible and help you with the process.
A very large error in the presentation: Employers who receive the benefit of the Employee Retention Credit must report the ERC as income OR a reduction of expense in the tax year of the quarter which generated the credit. In other words, if the employer qualifies for $30,000 of ERC for the 4th quarter of 2020 and applies for the credit in 2023, the 2020 tax report must be amended.
You make a great point. Although the ERTC is not taxable, it does reduce the payroll expense you paid in that quarter which means you get less of a deduction and therefore may owe more taxes on the increased income. Thank you for bringing this to attention.
I had no employees for the ERC, however, I was a new start up business in mid-2020. I did not have an employee until Q1/ 2022.
I'm interested in finding out more about the start up business credit. Where would I find out more?
You are probably not be eligible for the ERC and I’m not aware of a startup business credit unless there’s something available to you locally. You should discuss with an accountant or your payroll company.