Employee Retention Credits (ERC)

The Employee Retention Credits (ERC) are tax credits available to a wide range of businesses during the 2020 and 2021 calendar years that were designed to incentivize and enable employers keep their workers on payroll during the pandemic. These credits may be claimed retroactively if you satisfy the eligibility criteria described below.

The ERC offers a “fully refundable” tax credit for eligible employers. The ERC is taken on the employer portion of social security taxes, but if the credit is greater than social security taxes owed, the remaining amount will simply be paid directly (aka “fully refunded”) to employers. The ERC equals 70% of qualified wages in 2021, and up to 50% of qualified wages in 2020. Qualified wages are defined as follows:

• Qualified wages in 2021 include up to $10,000 per employee per quarter for each of the first three quarters of 2021, so the maximum credit an employer can receive per employee in 2021 is $21,000.
• Qualified wages in 2020 include up to $10,000 per employee per quarter between 3/13/20 and the end of the year, capped at $10,000 per employee, so the maximum credit an employer can receive per employee in 2020 is $10,000.

Note that special rules apply for new small business that started after February 15, 2020 — they may be eligible to get even larger ERC amount per quarter and to receive the credits for all four quarters of 2021.

Legislation passed in 2021 newly made the ERC available to businesses that took a loan under the Paycheck Protection Program (PPP), including first-round PPP borrowers who originally were ineligible to claim the tax credit; however, the credit can only be taken on wages that will not be forgiven under PPP.

Businesses are eligible to take this credit during any quarter in which either of the following conditions apply:

1. You have seen a significant drop in gross receipts, which is defined as follows:
   • For 2021, more than a 20% drop in gross receipts in that quarter (or the previous quarter) compared to the same quarter in 2019 is considered to be a “significant drop.” For example, you would be eligible to take the credit during the first quarter of 2021 if your receipts in either that quarter and/or the preceding quarter (the fourth quarter of 2020) were more than 20% below your receipts in the first quarter of 2019.
   • For 2020, a larger drop in gross receipts — more than a 50% compared to the same quarter in 2019 — is required to satisfy the requirements for a “significant drop.” And businesses are no longer eligible if in the subsequent quarter their receipts exceeded 80% of the receipts during the same quarter in 2019.
2. You are compelled to fully or partially suspend operations due to a government order. (Note that this latter condition would apply to a restaurant limited to takeout only, for example, or to a business forced to fully or partially suspend operations due to supply chain interruptions resulting from a government order. However, it would generally not apply to a farm deemed to be providing essential services).

Employers can take advantage of this credit when filing federal tax returns with IRS form 941 for non-farms or 943 for farms (or form 941-X or 943-X to claim the credit for previously filed quarters), and/or by using IRS form 7200 to claim a refund (aka “advance payment”). See this IRS webpage and this FAQ page for more details on the ERC and how to claim the credit; however, note that the content in both pages has not been updated (refer to the links at the top of the page for up-to-date ERC guidance).