The Ultimate Guide to Employee Retention Credits (ERC) Program
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The Ultimate Guide to Employee Retention Credits (ERC) Program

The Employee Retention Credit (ERC) program gives businesses that kept employees on the payroll despite shutdown orders or a significant reduction in gross receipts the opportunity to benefit from generous tax credits.

Why file for ERC?

  • Rewards eligible businesses and nonprofits that continued to pay employees despite economic hardships.

  • Credits eligible employers a maximum of $21,000 per employee for 2021(1) and up to $5,000 per employee for 2020.(2)

  • Available even for organizations that already filed their 2020 and 2021 taxes through amended filings.

  • ERC is a tax credit and not a loan, so businesses never need to repay it.

Employee Retention Credit Statistics

  • $10.5 Billion

    The IRS processed $10.5 billion in ERC claims during the first, second, and third quarters of 2020.(3)

  • $7.9 Billion

    The IRS processed $7.9 billion in ERC claims during the first quarter of 2021.(4)

  • $26,000

    Eligible employers who amend their tax returns could receive refunds of up to $26,000 per employee for 2020 and 2021 combined.

What Is the Employee Retention Credit (ERC)?

The Employee Retention Credit is a program intended to help employers who continued to pay their employees during the COVID-19 pandemic. Through the program, eligible employers receive a refundable payroll tax credit. Because the ERC credit is refundable, some organizations may be able to get refunds for more than what they paid for payroll taxes during 2020 and 2021. Not loans, Employee Retention Credits don’t need to be repaid, and they don’t appear as debt on businesses’ balance sheets.

The ERC went into effect with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)(7) and initially allowed employers to claim a payroll tax credit equal to 50% of qualified wages paid per employee from March 13 to December 31, 2020. The legislation capped the maximum ERC eligible wages per employee at $10,000 per year.

With the passage of the Consolidated Appropriations Act of 2021 (CAA), the ERC credit program expanded to 70% of qualified wages per employee.(8) In addition, the legislation made the ERC credits available per quarter rather than per year. As a result, qualified employers became eligible to receive up to $7,000 per employee per applicable quarter.

The American Rescue Plan Act of 2021 extended the deadline for ERC credits through September 2021, allowing eligible businesses to get a maximum tax credit of $21,000 per employee.(9) Recovery startup businesses, however, are eligible through December 2021.

Who Qualifies for the Employee Retention Credit?

To be eligible for the ERC, employers must fit business type, size, and financial requirements, and the rules are different for 2020 and 2021.

For 2020, eligible employers include for-profit businesses and tax-exempt organizations. Only employers with 100 or fewer employees qualify. In addition, companies and nonprofits need to satisfy one of two financial eligibility requirements.

Employers that made less revenue due to a full or partial shutdown required by a government order during any quarter from March 13 to December 31, 2020, are eligible. Businesses and nonprofits can also qualify if they saw a 50% decline in gross receipts compared to 2019, even if they were never impacted by a government-ordered shutdown.(10)

In 2021, for-profit businesses and nonprofit organizations remain eligible, and more types of employers qualify for the ERC. Specifically, the definition expanded to include governmental employers considered 501©(1) tax-exempt organizations and colleges and universities that primarily provide medical or hospital care.

The maximum size limits also rose, allowing employers with 500 or fewer employees to apply. ERC rules for January to September 2021, continue to permit businesses that experienced reduced revenues due to shutdowns to claim the tax credits. Employers not impacted by shutdown orders can claim the credit if their 2021 gross receipts were at least 80% less than in 2019.(11)

Some companies that launched during the COVID-19 pandemic can qualify for ERC tax credits for the third and fourth quarters of 2021. These businesses are called Recovery Startup Businesses (RSBs). Companies that opened after February 15, 2020, have annual gross receipts of under $1M, and have at least one employee that receives a W2 may qualify as RSBs.

Self-employed individuals generally don’t qualify for Employee Retention Credits. However, self-employed individuals who have one or more employees that receive a W-2 may be able to apply for credits on wages paid to their workers.(12)

How to Apply for Employee Retention Credit

The Employee Retention Credit program ended on December 31, 2021.

At this time, employers can no longer apply for Employee Retention Credits through the same process that was available while the program was still active, though they can still file to claim credits for 2020 and 2021 if they have not already done so.

The ERC was a refundable tax credit, not a government program. As a result, businesses didn’t need to complete an application to receive the tax credit. This is a major difference between the ERC and the Paycheck Protection Program (PPP), which required employers to fill out a loan request application.

While the ERC program was still in effect, eligible employers could reduce their employment tax deposits to an amount equal to their expected credit. Alternatively, they could claim the ERC on Form 941, Employer’s Quarterly Federal Tax Return.(13)

Although employers can no longer reduce employment tax deposits or claim Employee Retention Credits on Form 941, they can still benefit from the program retroactively. To do so, eligible employers must complete Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.

Because employers file Form 941 quarterly rather than annually, companies must complete one Form 941-X for each quarter that they were eligible for Employee Retention Credits but didn’t claim them.

For example, say an eligible company lost revenue due to a complete shutdown in the first quarter of 2021 and then experienced a 90% reduction in gross receipts during only the second and third quarters of 2021. That business would need to file three copies of Form 941-X: one each for the first, second, and third quarters. Once the IRS processes the forms, the employer would receive an ERC refund.

Completing the necessary paperwork to receive a payroll tax refund through the ERC program can be complicated and time-consuming. Calculating the total amount of the ERC credit per quarter and filling out Form 941-X correctly is essential to ensure timely processing. As a result, employers may wish to seek the services of ERC specialists who can guide them through the process.

Frequently Asked Questions

  • For 2020, calculate the ERC tax credit by taking 50% of the wages that each eligible employee earned from March 12, 2020, through December 31, 2020. Businesses can claim a maximum of $5,000 per employee. If all employees earned more than $10,000 during the period, a simple way to calculate the total is to multiply the number of eligible employees by $5,000. For 2021, calculate the ERC credit by taking 70% of the wages that each eligible employee earned per quarter. The IRS defines quarters as follows: January 1 to March 31, 2021, for the first quarter; April 1 to May 31, 2021, for the second quarter; June 1 to August 31, 2021, for the third quarter; and September 1 to December 31, 2021 for the fourth quarter. For each quarter that a company qualifies as an eligible employer, it can claim up to $7,000 per employee.(12)

  • Qualified wages include the amount of money paid to employees plus qualified health plan expenses that can be assigned to wages.(10) If a business provides a health plan, ERC accounting specialists can help determine which qualified health plan expenses to include in the calculations.

  • The IRS doesn't provide a service that will allow you to quickly check the status of the ERC refund online. For information about your payroll tax refund, contact the IRS by phone at (800) 829-4933 if you're a for-profit business and (877) 820-5500 if you're a nonprofit.(15)

  • The IRS is experiencing a backlog in processing Employee Tax Credit claims. It could take several months to over a year to receive a payroll tax refund. Errors in the paperwork and miscalculations can slow down the process. To avoid delays, enlist the help of an ERC company to help complete and file the paperwork correctly.

  • The American Rescue Plan Act is a piece of legislation signed into law by Joe Biden on March 11, 2021.(16) It extended the ERC credit program through December 2021.(17)

  • The Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) was signed into law by Donald Trump on March 27, 2020.(18) It created the ERC credit program to provide refundable payroll tax credits for eligible employers.

  • Most employers with 100 or fewer employees that lost revenue due to a government-mandated shutdown or saw a 50% reduction in gross receipts compared to 2019 are eligible for the Employee Retention Credit for 2020. For 2021, most employers with 500 or fewer employees who lost revenue due to a shutdown or made 80% less in gross receipts compared to 2019 are eligible.

  • Because the ERC tax credit program has ended, complete Form 941-X, the Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to claim Employee Retention Credits.

  • ERC stands for Employee Retention Credit. The name refers to the fact that the payroll tax refund program is for businesses that retained and continued to pay employees during the COVID-19 pandemic.

  • The procedure for filling out Form 941-X to request a payroll tax refund varies depending on the specifics of the business. An ERC firm can explain how to complete the form step-by-step and potentially even fill out the paperwork.

  • The Employee Retention Credit program allows you to receive a payroll tax refund if you continued to pay employees during 2020 and/or 2021 despite government-ordered shutdowns or a significant reduction in gross receipts. A qualified business can receive credits per eligible employee per year in 2020 and per quarter in 2021. The credits provide a payroll tax refund.

  • The deadlines to file an amended payroll tax return for ERC credits are April 15, 2024, for 2020 and April 15, 2025, for 2021.

  • With the passage of the Consolidated Appropriations Act, companies that received PPP loans may be eligible for the ERC payroll tax refund program.

  • No, the ERC is not a loan. It is a payroll tax refund that doesn't need to be repaid. Claiming the tax credits with the help of a company that provides ERC services won't put a business in debt.