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Overview: What is the Employee Retention Credit?

mattlevy
Matthew Levy Updated: June 27, 2023 • 6 min read
business owner with workers

The Employee Retention Credit (ERC) is a government tax credit that supports businesses who retained their employees during COVID-19 despite financial losses. It was originally created as part of the CARES Act and has been amended a few times since.

ARTICLE KEY POINTS:

  • The Employee Retention Credit (ERC) is a tax credit provided by the government to help businesses that kept their employees on payroll during the COVID-19 pandemic despite experiencing financial hardships.
  • Small business owners should be aware that they can still claim the ERC for 2020 and 2021 even if they have already filed taxes for those years. Fill out form 941-X to file retroactively. 
  • To take advantage of the ERC, businesses need to understand the eligibility requirements and keep proper documentation on employee count, wages paid and receipts. If your business is eligible, you may get up to $26,000 back per employee.

If your business was negatively impacted by the pandemic, it’s critical to understand if you’re eligible to claim the ERC. If you fit the requirements, you may be able to get $26,000 back from the IRS per employee. 

How Do You Claim the Employee Retention Credit?

Although several years have passed since the beginning of the pandemic, you can still benefit from claiming this tax credit. Simply file adjusted employment tax returns to claim it. If you file quarterly employment tax returns, you can use Form 941-X, which is the Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to claim the credit for previous quarters in 2020 and 2021.

Businesses have until April 15, 2024 to claim the 2020 ERC and until April 15, 2025 to claim the 2021 ERC.

You may be able to claim up to $26,000 per employee through the Employee Retention Credit.

Employee Retention Credit: Eligibility Criteria

To claim the Employee Retention Credit (ERC), your business has to meet several requirements. Note that the eligibility criteria is different for the tax year 2020 versus 2021. Consult the below chart for an overview of the eligibility highlights you should be aware of. 

Tax Year

Number of employees

Monetary loss as a result of pandemic

Drop in revenue

Maximum credit

2020

Small businesses are considered those with 100 or less full-time employees.

Forced to reduce operations in 2020 or 2021 due to government mandates.

OR

Faced noticeable reduction in gross receipts due to the pandemic.

Gross receipts less than 50% of those in the same quarter of 2019.

$5,000 per employee

2021

Businesses with 500 full-time employees or fewer are eligible.

Gross receipts less than 80% of those in the same quarter of 2019.

$7,000 per employee

*Third and fourth quarter 2021

“Recovery startup businesses” are eligible – those with annual gross receipts of under $1 million AND that began operating after February 15, 2020.

 

Must have one or more W2 employees.

Provide evidence of a significant decline in gross receipts.

$50,000 per calendar quarter

Let's delve more deeply into the requirements.

Revenue requirements

Your business qualifies if it experienced a significant decrease in gross receipts or operations due to pandemic-related government orders. These orders might have resulted in your business being completely or partially closed or suspended. 

For the purpose of claiming the ERC, "gross receipts" should refer to the number you claimed on your tax return. 

  • 2020 revenue requirements: If your businesses' gross receipts dropped below 50% compared to the same quarter in 2019, you may qualify for the Employee Retention Tax Credit.
  • 2021 revenue requirements: In 2021, businesses need to have experienced forced closures, quarantines, or a drop of more than 20% in quarterly gross receipts compared to the same quarter in 2019.
  • Third and fourth quarter of 2021 only: A third eligibility category of "recovery startup businesses" was added for the later quarters of 2021. If your business started operating after February 15, 2020 and faced a decline in gross receipts, you may be able to claim up to $50,000 per quarter.

Note, you cannot include wages paid from other relief programs, like the Paycheck Protection Program (PPP) towards your eligibility for ERC. 

Timeline requirements

The eligibility timeline for the ERC spans from March 12, 2020, through December 31, 2021.

Note, if you’d like to claim the ERC for only the last quarters of 2021, your business must be considered a “recovery startup business,” as mentioned above.

Size requirements

Over time, the eligibility for claiming the Employee Retention Credit has expanded. 

  • 2020 small business size requirements: Small businesses were those that averaged 100 or fewer full-time monthly employees in 2019.
  • 2021 small business size requirements: In 2021, the IRS expanded the small business definition to include those with 500 or less full-time monthly employees in 2019.
  • Large employers: Large employers can only claim the ERC for wages paid to employees during periods they were not providing services. They can also use the ERC to offset their Social Security tax liability up to certain limits.

Understanding the nuances in the ERC's eligibility criteria is fundamental to figuring out whether this credit might apply to your business. Considering the complexities involved, it's wise to consult an ERC professional for the most up-to-date and in-depth information.

Determine How Much Money You Can Get Back

The amount of money you receive back by claiming the ERC is dependent on the amount of qualified wages that you paid to your employees during the pandemic (specifically, between March 12, 2020 to December 31, 2021). 

Most wages paid during the eligibility period can count towards the credit calculation for eligible small businesses. For larger businesses, only the wages paid to employees during the time they were not providing services due to pandemic-related circumstances can be considered.

The maximum credit per employee is substantial. For 2020, you may claim up to $5,000 per employee, based on 50% of up to $10,000 in qualified wages, and in 2021, you can claim up to $7,000 per employee per quarter, based on 70% of up to $10,000 in qualified wages.

Tax Year

Maximum Qualified Wages

Percentage

Maximum ERC per Employee

2020

$10,000 annually

50%

$5,000 annually

2021

$10,000 quarterly

70%

$7,000 quarterly

TOTAL

 

 

$26,000 per employee

 

Navigating the specifics of these calculations can be challenging. As always, we recommend referring to the official IRS website or consulting with a third-party ERC expert to understand how these calculations apply to your unique business situation.

When Will You Receive Your ERC Refund?

Once you've determined your eligibility and calculated your potential credit, you can claim the ERC on your employment tax return. This could lead to a reduction in your required tax deposits, effectively offsetting your payroll tax liabilities.

You submit your claim through Form 941, the Employer's Quarterly Federal Tax Return. If you've already filed taxes for those quarters but weren't aware that you could claim the ERC at the time, you can amend your quarterly filing   Form 941-X. After submission, the IRS will process your claim, and if approved, you'll receive your credit. The IRS is currently experiencing a backlog of ERC requests, so it may take longer than the typical few weeks to receive the credit.

Once you claim the ERC for your business, be sure to also make changes to your relevant tax return to include the extra income from the credit. Adjust your tax return for the year in which you qualified for the credit, not the year in which you received the credit from the IRS. 

Businesses have until April 15, 2024 to claim the 2020 ERC and until April 15, 2025 to claim the 2021 ERC.

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Conclusion

The Employee Retention Credit (ERC) can be a significant financial relief for businesses negatively impacted by the pandemic. Understanding eligibility requirements and how to calculate potential refunds is key. Don't hesitate to explore your eligibility, and refer to the IRS website for further guidance.

FAQ

1. Can I claim the ERC if I’ve already claimed other pandemic-era tax breaks for businesses?
Yes, businesses can claim the ERC even if they've claimed other pandemic-era tax breaks. However, they cannot use the same wages to calculate both the ERC and other tax credits. A tax professional can help you understand the details when it comes to claiming both.

2. Can I still claim the ERC in 2023?
Yes, businesses can amend their tax returns for 2020 and 2021 to claim the ERC until 2025​.

faq-icon

FAQ

Can I claim the ERC if I’ve already claimed other pandemic-era tax breaks for my business?

Yes, businesses can claim the ERC even if they've claimed other pandemic-era tax breaks. However, they cannot use the same wages to calculate both the ERC and other tax credits. A tax professional can help you understand the details when it comes to claiming both.

Can I still claim the ERC in 2023?

Yes. Businesses have until April 15, 2024 to claim the 2020 ERC and until April 15, 2025 to claim the 2021 ERC.

mattlevy
Written by Matthew Levy

Matthew is a freelance financial copywriter with 14+ years in financial services. He holds a Bachelor of Science degree in Economics with business and finance options and is a CFA Charterholder. He is from Vancouver, Canada, but writes from all over the world.