Created under the CARES Act, the Employee Retention Credit (ERC) was a temporary program that incentivized employers to maintain payroll during the early part of the pandemic. The Internal Revenue Service (IRS) ended the credit in 2021.
If you’re combing through your business’s tax history and trying to determine whether or not you can still take advantage of the ERC, we’re here to provide some clarity.
Keep reading for a series of FAQs on the ERC.
What is the Employee Retention Tax Credit (ERC)?
The ERC is a refundable payroll tax credit that was available to employers who kept their W2 employees on payroll in 2020 and 2021, during the period of COVID-19 pandemic-related business slowdowns, closures by government order, and other suspension of operations.
Here’s what the credit offered:
For Tax Year 2021: A credit of up to 70% of each employee’s qualified wages.
For Tax Year 2020: A credit of up to 50% of each employee’s qualified wages, up to $5,000 for the year.
See this ERC guide for full details.
When did the ERC program run?
For most businesses, the ERC program ran from March 2020 to September 30, 2021; the passage of the Infrastructure Bill cut the ERC program short.
However, there was an exception for Recovery Startup Businesses, businesses that started after February 15, 2020, and had gross receipts under $1M. Those businesses could take advantage of the ERC through December 31, 2021.
How did ERC details change from tax year 2020 to tax year 2021?
The eligibility requirements and amount of qualified wages were confusing, to be sure; this table should help:
2020 March 13, 2020 – December 31, 2020 | 2021 (Q1 and Q2) January 1, 2021 – June 30, 2021 | 2021 (Q3)July 1, 2021 – September 30, 2021 |
Eligible employers must have between 1 – 100 W2 employees (excluding the owners) | Eligible employers must have between 1 – 500 W2 employees (excluding the owners) | Eligible employers must have between 1 – 500 W2 employees (excluding the owners) |
Eligible businesses must have been in operation before February 16, 2020 | Eligible businesses must have been in operation before February 16, 2020 | It is possible to be eligible if you started your business after February 15, 2020; if your gross receipts are under $1M, you may qualify as a Recovery Startup Business |
The maximum credit amount per employee is $5000 for the year | The maximum credit amount per employee is $7000 for the quarter ($28,000 for the year) | The maximum credit amount per employee is $7000 for the quarter ($28,000 for the year) |
Credit is 50% of qualified wages | Credit is 70% of qualified wages | Credit is 70% of qualified wages |
To qualify for ERC, you must see a significant decline of 50% in gross receipts when comparing corresponding quarters in 2020 and 2019 | To qualify for ERC, you must see a decline of 20% in gross receipts when comparing corresponding quarters in 2021 and 2019 | To qualify for ERC, you must see a decline of 20% in gross receipts when comparing corresponding quarters in 2021 and 2019 |
What does it mean when a tax credit is refundable?
This means that even if the credit amount exceeds the amount of taxes you owe, the government will send you a check for the difference.
How do I know if I’m eligible for the ERC?
ERC eligibility criteria are strict. First, you must be an employer of fewer than 500 W2 employees (other than yourself and members of your family). Self-employed people with no employees aren’t eligible for the ERC, but small businesses (under 50 people) are as long as they meet the criteria.
Then, you must have experienced a loss in gross receipts or have been subject to a government shutdown. See these flowcharts to understand how eligibility works for tax year 2020, tax year 2021 (Q1 and Q2), and tax year 2021 (Q3 and Q4).
What time frames can be compared to determine a loss in gross income?
All time frames must compare with the corresponding quarter in 2019. So, if you are looking at Q2 in 2020, you must compare that with Q2 in calendar year 2019. If you are looking at Q2 in 2021, you still should compare it with Q2 in 2019. However, if your business did not exist at the beginning of the same quarter of 2019, you can substitute the same quarter in 2020 instead.
My business didn’t exist in 2019; how do I determine eligibility?
See the question above: simply substitute the same quarter in 2020.
One of my employees is a family member; can I claim a credit against this employee’s wages?
No. Family members are not eligible employees.
I’m a sole proprietor; am I eligible for ERC?
No.
What’s considered a full-time employee for ERC?
For the purposes of the ERC, a full-time employee is defined as one who, in any calendar month, worked at least 30 hours per week or 130 hours in a month.
What’s a qualified wage?
Any wages for which you pay FICA or group health expenses.
Do tips count as qualified wages?
Yes. Any wages for which you pay FICA tax count (and you should be paying FICA taxes on tips).
Are group healthcare expenses considered qualified wages?
Yes.
Do employee wages from before March 13, 2020 count as qualified wages?
No. There are no qualified wages (for both PPP and ERC) prior to March 13, 2020.
How much ERC can I claim?
For 2020, you can claim up to 50% of qualified wages up to a maximum amount of $5,000 for the year for every eligible employee.
For 2021, you can claim up to 70% of qualified wages up to a maximum amount of $7,000 for the quarter ($21,000 for the year) for every eligible employee.
When does eligibility stop?
For tax year 2020 through Q3, you are eligible within the quarter that saw the 50% gross receipt loss and every quarter after until you get back to 80% of gross receipts when compared to the corresponding quarter in 2019.
For example:
In Q2 your business was down 58% compared to Q2 of 2019, so you qualify for ERC.
In Q3, your business was down 32% compared to Q3 of 2019 (you still qualify for ERC in the fourth quarter because your revenue loss is greater than 20%)
Now eligibility stops.
For tax year 2021, you are eligible within the quarter that saw the 20% gross receipt loss and every quarter after until you get back to 80% of gross receipts when compared to the corresponding quarter in 2019. And then, the following quarter is ALSO eligible even if your gross receipts have been restored.
In Q1, your business was down 60% compared to Q2 of 2019, so you qualify for ERC.
In Q2, your business was down 3% compared to Q3 of 2019 however you STILL qualify for ERC because this quarter follows a quarter in which you were eligible.
Now eligibility stops.
I got PPP, can I qualify for ERC?
Yes, but any wages paid with PPP funds are not considered qualified wages. (This is sometimes called “double-dipping” and it’s not allowed.)
How do I claim the credit?
In 2026, it’s too late to claim the ERC. As of April 2025, the window for claiming the ERC has officially closed. The IRS is still processing claims.
I already filed my 2020 taxes, but I didn’t claim the credit. Can I do so retroactively?
If you already filed your taxes for 2020, you can retroactively claim the credit. To do this, fill out Form 941-X.
How does the Work Opportunity Tax Credit (WOTC) affect my ability to get the ERC?
You can qualify for both credits, but you cannot double dip. This means that any employee wages for which you claim WOTC cannot also be claimed for ERC.
I got an Economic Injury Disaster Loan (EIDL); was I also eligible for the ERC?
Yes. There were no restrictions around ERC for those who received EIDL.
My business didn’t start operating until after February 15, 2020; can I still claim the credit? What is a Recovery Startup Business?
If your business started after February 15, 2020 and your gross receipts are under $1M, you may qualify for ERC as a Recovery Startup Business. You don’t have to demonstrate a loss in gross receipts in order to qualify for ERC. This is the only type of business eligible for ERC in Q4 of 2021.
However, if you’re trying to claim the credit after April 2025, you’re too late. The IRS isn’t accepting additional claims.
What is a Severely Distressed Employer?
If you experienced over 90% loss in gross receipts when comparing a quarter against the corresponding one in 2019, you are a Severely Distressed Employer, and you were not subject to caps or maximums when claiming ERC.
Additional Employee Retention Credit FAQs
How much is the Employee Retention Credit worth?
The ERC was worth up to $26,000 per employee, depending on which tax year you applied for the credit.
What documentation should businesses keep to support an Employee Retention Credit claim?
If you applied for the ERC, you needed to have records verifying that you employed and retained people during the tax years the ERC was eligible. That means you needed payroll records, personnel documents, gross receipts, health plan documents, and records detailing operational obstacles and business slowdowns.
How does the Employee Retention Credit interact with PPP loans or other relief programs?
You could receive the ERC tax benefit and loan forgiveness from the Paycheck Protection Program (PPP), but you couldn’t double dip, meaning you couldn’t use the same wages to apply for the ERC and PPP.
How long does it take to receive an Employee Retention Credit refund after filing?
Getting your ERC refund can take a minimum of eight months. The IRS still has about 20,000 unprocessed ERC claims from 2020-2024.
What happens if a business claimed the ERC incorrectly?
If you incorrectly claimed the ERC, you’ll need to submit an amended return and pay back the refund you received, along with penalties and interest. If you want to withdraw your claim if it hasn’t been paid yet, you can do so at IRS.gov.
Does claiming the Employee Retention Credit increase the risk of an IRS audit?
Yes, the IRS applied special scrutiny to businesses that claimed the ERC. If you claimed the ERC, make sure you’ve maintained the necessary records and are prepared to undergo a potential tax audit.
