The Ultimate Guide to Employee Retention Credits (ERC) Program

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.