Update on November 18, 2021: With the passage of the Infrastructure Bill, the ERC program has been cut short. The program has now expired on September 30, 2021, which means that in tax year 2021, the maximum tax credit available to an employer (per employee) is $21,000.
An important exception: if you own/operate a Recovery Startup Business (a business that started after February 15, 2020 and has gross receipts are under $1M), you may still be eligible for ERC through Q4 of 2021. Recovery Startup Businesses are the only businesses that may claim ERC through the end of the year.
It’s no secret that the Employee Retention Credit (ERC) is confusing and with all the changes and expansions to the program, it can be difficult to understand how your business can take advantage of this program. Here are some often-asked questions on ERC.
What is the Employee Retention Credit (ERC)?
The ERC is a refundable payroll tax credit that is available to employers who retain their W2 employees by keeping them on the payroll.
If eligible, recipients of the ERC may:
- For Tax Year 2021: Receive a credit of up to 70 percent of each employee’s qualified wages.
- For Tax Year 2020: Receive a credit of up to 50 percent of each employee’s qualified wages, up to $5,000 for the year.
See this ERC guide for full details.
Until when will the ERC program run?
For most businesses, the ERC program expired on September 30, 2021; the passage of the Infrastructure Bill cut the ERC program short.
However, there is an exception on the expiration for Recovery Startup Businesses (businesses that started after February 15, 2020 and has gross receipts are under $1M), which may still be eligible for ERC through Q4 of 2021.
How do ERC details change from tax year 2020 to tax year 2021?
It’s 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 businesses 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 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?
First, you must be an employer of fewer than 500 W2 employees (other than yourself and members of your family).
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 receipts?
All timeframes must compare with the corresponding quarter in 2019. So, if you are looking at Q2 in 2020, you must compare that with Q2 in 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 that 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 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 percent of qualified wages up to a maximum amount of $5000 for the year for every eligible employee.
For 2021, you can claim up to 70 percent of qualified wages up to a maximum amount of $7000 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 percent gross receipt loss and every quarter after until you get back to 80 percent of gross receipts when compared to the corresponding quarter in 2019.
For example:
- In Q2 your business was down 58 percent compared to Q2 of 2019, so you qualify for ERC.
- In Q3 your business was down 32 percent compared to Q3 of 2019 (you still qualify for ERC in Q4 because your revenue loss is greater than 20 percent)
Now eligibility stops.
For tax year 2021, you are eligible within the quarter that saw the 20 percent gross receipt loss and every quarter after until you get back to 80 percent 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 percent compared to Q2 of 2019, so you qualify for ERC.
- In Q2 your business was down 3 percent 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 order to claim the new Employee Retention Credit (if eligible), you must calculate your total qualified wages and the related health insurance costs for each quarter, and subtract that amount from your deposit on Form 941, Employer’s Quarterly Federal Tax Return.
If you already filed your taxes for 2020, you can retroactively claim the credit. To do this, fill out Form 941-X.
If you qualify as a small employer (500 or fewer full-time employees in 2019) you may request advance payment of the credit using Form 7200, Advance of Employer Credits Due to Covid-19.
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.
I already get the Work Opporunity Tax Credit (WOTC); can I also get ERC?
Yes, 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); can I also get ERC?
Yes. There are no restriction 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.
What is a Severely Distressed Employer?
If you experienced over 90 percent loss in gross receipts when comparing a quarter against the corresponding one in 2019, you are a Severely Distressed Employer and you are not subject to caps or maximums when claiming ERC.
