The Employee Retention Credit (ERC), sometimes called the Employee Retention Tax Credit (ERTC), is a U.S. federal tax credit that was available to certain employers, most recently during the COVID-19 pandemic. It was originally designed to help employers who were not eligible for a Paycheck Protection Program loan, but it was later amended so employers who received Paycheck Protection Program loan forgiveness were often still eligible for the Employee Retention Credit. Due to a substantial number of improper claims, processing of amended forms claiming the Employee Retention Credit was temporarily suspended as of September 14, 2023. The claim period ended on April 15, 2025.
Employee Retention Credit during the COVID-19 Pandemic Overview The Employee Retention Credit is a refundable tax credit against an employer's payroll taxes.Healey, Brenden (September 13, 2022). "How to Claim the Employee Retention Credit". CBIA. It was established as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law by President Donald Trump, in order to help employers during the pandemic. The American Rescue Plan Act of 2021, signed into law by President Joseph Biden, expanded the tax credit to additional employers.Angell, Melissa (December 20, 2022). "The Employee Retention Credit Is a Great Deal--but Beware 'ERC Mills'". Inc..Zerbe, Dean (February 15, 2022). "Employee Retention Credit — Still The One (The Latest Update)". Forbes.
Eligibility There are two ways for an employer to be eligible for the Employee Retention Credit for a particular calendar quarter.Burns, Maxwell (March 5, 2023). "How Nonprofits Should Account for the Employee Retention Credit". South Florida Business Journal.
The employer experienced a significant decline in gross receipts, or The employer either fully or partially suspended its operations because of governmental orders related to COVID-19 that limited commerce, travel, or group meetings.
An eligible employer must be a for-profit entity, an organizations that is tax-exempt under section 501(c) of the Internal Revenue Code, public colleges and hospitals, or a tribal government or entity. A household employer is not eligible. Self-employed individuals may take the Employee Retention Credit for the wages paid to their employees but not for their own compensation.
Significant Decline in Gross Receipts For 2020, a significant decline in gross receipts begins during a calendar quarter in which gross receipts decreased by at least 50percent compared to the corresponding quarter in 2019.Hardick, Joseph A. (2022). "Don't Miss Out on the Employee Retention Credit". Central New York Business Journal. Gross receipts include all income for the employer, including donations and grants. When an employer meets this test for a calendar quarter, the effective date is the first day of that particular calendar quarter. When an employer's gross receipts for a calendar quarter decreased no more than 20percent compared to its gross receipts for the same corresponding quarter in 2019, the employer's eligibility ends on the day following that calendar quarter.
For 2021, a significant decline in gross receipts begins during a calendar quarter in which gross receipts decreased by at least 20percent compared to its gross receipts for the same corresponding quarter in 2019. Alternatively, an employer can compare its gross receipts to the previous calendar quarter, such as if the employer was not in business during 2019.
Certain businesses that are related to each other may be considered one business when determining whether there was a significant decline in gross receipts.Pierce, Tom (December 29, 2022). "Still Waiting For Your Employee Retention Credit Refund? You Are Not Alone". ORBA. Mondaq.
The reason for the significant decline in gross receipts is not relevant, and it does need to be directly related to the COVID-19 pandemic.Mayo, Daniel (June 21, 2022). "Will The IRS Deny Your Claim For The Employee Retention Tax Credit?" Forbes.
Fully or Partially Suspended Operations The employer is eligible if there was an order from the government to limit commerce, travel, or group meetings that resulted in the employer's partial or full suspension of operations.Tenney, Devin; Wronsky, Michael (October 1, 2022). "Employee Retention Credit: Navigating the Suspension Test". The Tax Adviser.
An order from the government includes an official rule from any federal, state, or local government that has jurisdiction over the employer. The governmental order must have caused the employer to either fully or partially suspend its operations.
Only governmental orders and mandatory requirements qualify. Recommendations, suggestions, and best practices issued by governmental entities do not qualify.
In order to qualify, the order from the government must have affected an activity of the employer that constituted at least 10percent of the employer's total gross receipts in 2019. Alternatively, the limitation must affect a portion of the employer's operations that constituted at least 10% of the working hours performed by its employees in 2019.
A governmental order that reduced the maximum occupancy of the employer's place of business would likely qualify, for example, while a governmental order requiring all employees and clients to wear facemasks probably would not qualify. If a governmental order that requires the business's employees to work at home and the employer is able to conduct its business this way, then that order would be unlikely to qualify.
Amount of the Employee Retention Credit
For 2020 The Employee Retention Credit is equal to 50percent of qualified wages paid to eligible employees between March 13, 2020, and December 31, 2020.Mills, Mechele Agbayani (April 5, 2020). "Pandemic: Help Available for Businesses". Tyler Morning Telegraph (Tyler, Texas). p. A7.
Eligible employee is defined differently depending on the size of the employer. If the employer averaged 100 or fewer full-time employees during 2019, then all of its employees are eligible employees. For larger employers, only employees who were paid for not performing work are considered eligible employees.
Qualified wages are defined as wages that are subject to social security taxHall, Will (February 1, 2023). "Churches: How to file for ERC tax refund". Baptist Message. and that were paid to employees. Qualifying wages also include qualified health plan expenses that the employer incurred or paid for eligible employees.Hogsette, Ashley (August 18, 2022). "Six Misconceptions About Employee Retention Credit Eligibility (Correct)". Bloomberg. Qualified health plan expenses include costs for group health insurance, group dental insurance, group vision insurance, group prescription drug insurance, health flexible spending account (FSA), or a health reimbursement account (HRA).Lee, Grace; Moran, Christopher (May 9, 2022). "Employee Retention Credit for Independent Schools". Venable. Qualified wages may not exceed $10,000 per eligible employee during that period.Miles, Jon M. (April 14, 2020). "CARES Act provides employee retention Credit". The Daily Oklahoman (Oklahoma City, Oklahoma). p. B5.
An employer is not allowed to take the Employee Retention Credit on any wages or health plan expenses that the employer counted for its Paycheck Protection Program (PPP) loan forgiveness, Emergency Paid Sick Leave, or Emergency Paid Family Leave.
Because an employer may claim a 50-percent tax credit on up to $10,000 per eligible employee, an employer may take a maximum tax credit of $5,000 per eligible employee in 2020.Wallace, Gary (October 25, 2022). "What CFOs Need to Know About the IRS Employee Retention Credit Crackdowns". CFO.
For 2021 The Employee Retention Credit is equal to 70 percent of qualified wages paid between January 1, 2021, and September 30, 2021. If the employer is a recovery startup business, then it is based on qualified wages paid between January 1, 2021, and December 31, 2021.
Qualified wages are wages subject to social security tax and paid to employees between January 1, 2021, and September 30, 2021, limited to up to $10,000 per quarter per employee in 2021. Just like 2020, qualified wages also include qualified health plan expenses, but exclude wages used for its Paycheck Protection Program (PPP) loan forgiveness and payments of Emergency Paid Sick Leave and Emergency Paid Family Leave. A 70-percent tax credit on up to $10,000 per employee per quarter means the maximum Employee Retention Credit is $7,000 per employee per quarter in 2021.
For 2021, if the employer had an average of 500 or fewer full-time employees in 2019, then all of the employer's employees are eligible employees. Otherwise, only employees who were paid and who did not perform work are generally eligible employees.
Receiving the Employee Retention Credit During 2020 and 2021, an employer was able to use the Employee Retention Credit to reduce its federal tax deposits, namely its the deposits of federal withholding tax, employee social security tax, employee Medicare tax, employer social security tax, and employer Medicare tax.
If the employer's Employee Retention Credit exceeded its federal tax deposits, the employer was able to receive the additional tax credit refunded to it by check when it filed its Form 941.Blaisdell, Eric (January 20, 2021). "Virus Counts Show Decrease". Rutland Daily Herald (Rutland, Vermont). p. A1, A5.
Employers that wanted to receive the tax credit before its next Form 941 was filed were allowed to fax a completed Form 7200 to the Internal Revenue Service in order to request a check sooner.Rosenberg, Joyce M. (February 8, 2021). "Tax Break Extended". Associated Press. Messenger-Inquirer (Owensboro, Kentucky). p. A4.
An employer that has already filed its Form 941 for each quarter may file a Form 941-X with the IRS in order to request the tax credit be refunded to it by a check by mail.Chen, Rebecca (February 4, 2023). "3 tax breaks small businesses don't want to miss". Yahoo! Finance. An employer may file Form 941-X to receive a tax refund up to three years and four months after the end of the calendar year if the original Form 941 was filed before that date."Form 941-X Instructions". Internal Revenue Service. May 26, 2023. "Generally, you may correct overreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date Form 941 was filed or 2 years from the date you paid the tax reported on Form 941, whichever is later. You may correct underreported taxes on a previously filed Form 941 if you file Form 941-X within 3 years of the date the Form 941 was filed. We call each of these time frames a period of limitations. For purposes of the period of limitations, Forms 941 for a calendar year are considered filed on April 15 of the succeeding year if filed before that date." It is common for an employer to wait eight months for the Internal Revenue Service to process its Form 941-X.
As a tax credit, there are no limitations as to how the employer uses the funds from the tax refund.Bernath, Jenna (March 1, 2023). "Harlem non-profit gets unexpected financial help through Employee Retention Credit program". The Villager.
The claim period for the Employee Retention Credit ended on April 15, 2025."The ERC Claim Period Has Closed – The IRS Must Now Prioritize Resolution, Communication, and Taxpayer Protections". National Taxpayer Advocate. May 8, 2025.
Relation to other tax deductions An employer's tax deduction for qualifying wages must be reduced by the amount of the Employee Retention Credit. Consequently, an employer that amends its tax forms to claim the Employer Retention Credit for previous quarters may also be required to amend its income tax returns in such a scenario.