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Updated December 01, 2023 Reviewed by Reviewed by Robert C. KellyRobert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.
The Employee Retention Credit (ERC) was a refundable tax credit that small businesses could claim during the COVID-19 pandemic. It provided some relief for struggling businesses that kept employees on their payrolls in 2020 and 2021 even when government pandemic restrictions required them to suspend or reduce their operations. The Infrastructure Investment and Jobs Act (IIJA) of 2021 eliminated most employers' ability to claim an ERC for wages paid after Sept. 30, 2021.
However, while the credit has ended, you may still be able to claim it for the periods it covered if you have yet to do so. Here is what you need to know.
Some businesses may still qualify for the ERC, but you will need to act without delay. As the Internal Revenue Service (IRS) explains on its website:
"Eligible businesses that didn't claim the credit when they filed their original employment tax return can claim the credit by filing adjusted employment tax returns. For example, businesses that file quarterly employment tax returns can file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to claim the credit for prior 2020 and 2021 quarters."
Business owners can file a Form 941-X up to three years after initially filing or two years after paying, whichever is later. Errors or mistakes can be reported using this form as well. Claims can be filed with respect to unclaimed credits for 2020 until April 15, 2024, and for 2021 until April 15, 2025.
On Sept. 14, 2023, the IRS announced "an immediate moratorium through at least the end of the year" on processing new ERC claims. The agency said it was taking the action because of fraud concerns, in particular involving businesses that had been "pressured and scammed by aggressive promoters and marketing" into filing questionable claims. A month later, the IRS announced a "special withdrawal process" for business owners who had filed a possibly ineligible claim, but not yet received the money, allowing them to withdraw it without facing penalties or interest.
The Employee Retention Credit (ERC) was a refundable payroll tax credit for "qualified wages" paid to retained employees, originally from March 13, 2020, to Dec. 31, 2020. It was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act.
The purpose of the ERC was to encourage businesses to keep employees on the payroll even if they were not working during the covered period as a result of the outbreak of coronavirus. The original ERC was modified several times. Ultimately, it was halted as of Sept. 30, 2021, ahead of the original schedule, except for startup recovery businesses, as defined by the Infrastructure Investment and Jobs Act (IIJA) and explained below.
According to the IRS, it had received some 3.6 million claims as of September 2023.
Whether you qualified as an eligible employer (or might still qualify as one) depends on the rules for each particular period. Here are the dates for those periods and their eligibility requirements.
For the period from March 13, 2020, through Dec. 31, 2020, you must have carried on a trade or business, or you must have run a tax-exempt organization that:
Government and state entities and political subdivisions were not eligible for the 2020 ERC.
If you were self-employed, you were not eligible for the 2020 ERC for your wages. But if you employed other people, you may have qualified for the ERC based on the wages you paid those employees.
For the period from Jan. 1, 2021, through Sept. 30, 2021, you must have carried on a trade or business or run a tax-exempt organization that:
If you were not in business in 2019, you could use 2020 as your comparison year.
Government and state entities and political subdivisions were not eligible for the 2021 ERC. However, tax-exempt public colleges, universities, and hospitals were eligible.
As in the previous period, self-employed people were not eligible for the 2021 ERC for their wages. But if they employed other people, they could qualify for ERC wages paid to those employees.
The "significant decline in gross receipts" test for both 2020 and 2021 applies to whether your business was affected by COVID-19 or not.
Most employers did not qualify for the ERC from Oct. 1, 2021, through Dec. 31, 2021.
That's because the Infrastructure Investment and Jobs Act limited the availability of the employee retention credit in the fourth quarter of 2021 to recovery startup businesses, as defined in section 3134(c)(5) of the tax code.
A recovery startup is a business that:
Business owners who were not recovery startup businesses were not eligible for the employee retention credit for wages paid after Sept. 30, 2021.
The number of full-time employees you averaged in 2019 determined which employees you could claim for the credit. (However, employers could also include wages paid to part-time workers as long as they met the requirements.)
For 2020, if you averaged more than 100 full-time employees in 2019, only wages for those you retained who were not working could be claimed. However, if you had 100 or fewer workers, you could claim the wages of all employees whether or not they were working.
For 2021, the threshold was raised to 500 full-time employees, meaning that if you employed more than 500 people, you could only claim the ERC for those not providing services. If you had 500 or fewer employees, you could claim the ERC for all of them, working or not.
You could not claim the ERC for:
For 2020, the credit was equal to 50% of up to $10,000 in qualified wages per employee (including amounts paid toward health insurance) for all eligible calendar quarters beginning March 13, 2020, and ending Dec. 31, 2020, up to $10,000 per eligible employee annually.
A qualifying period began in any quarter where receipts were less than 50% of receipts in the same quarter in 2019. It ended at the beginning of the first calendar quarter after the first quarter in which gross receipts were greater than 80% of gross receipts for that quarter in 2019.
The credit was applied to your portion of the employee's Social Security taxes and was fully refundable. This means that the credit served as an overpayment and would be refunded to you after subtracting your share of those taxes.
For 2021, the credit was equal to 70% of up to $10,000 in qualified wages per employee (including amounts paid toward health insurance) for each eligible calendar quarter beginning Jan. 1, 2021, and ending Sep. 30, 2021. This works out to a maximum credit of $21,000 per employee ($7,000 per quarter).
The credit was applied to your portion of the employee's Social Security taxes and was fully refundable. Again this means that the credit would serve as an overpayment and be refunded to you after subtracting your share of those taxes.
If you received a Paycheck Protection Program (PPP) loan during the pandemic and have portions that are unforgiven, you're still able to claim the credits retroactively, but:
A tax credit reduces the tax a business or individual owes on a dollar-for-dollar basis, unlike a tax deduction, which only reduces the amount of income on which their taxes are calculated. A refundable tax credit, like the ERC, is one that allows the taxpayer to claim the full credit even if it exceeds their tax obligations, in which case they will receive a refund for the excess.
For March through December 2020, the maximum ERC was $10,000 per employee for the year. From January to September 2021 (or December 2021 in some cases), the maximum was $7,000 per employee per quarter, or $21,000 for the year.
When the IRS announced a moratorium on new ERC claim applications in September 2023, it reported that it had 600,000 pending claims and that "processing times could easily stretch to 180 days or longer," up from the earlier goal of 90 days. It added that "many applications will be facing additional compliance scrutiny, which means the payments could take even longer to be processed." The IRS has not announced when the moratorium on new claims will be lifted but said it would continue at least through the end of 2023.
The Employee Retention Credit was a refundable tax credit intended to help small business owners keep employees on the payroll during the COVID-19 pandemic. While the credit was discontinued at the end of 2021, if you believe your business would have been eligible for it, you may still be able to claim it for a limited period of time.
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