AMARILLO, TX – Despite its name, the Employee Retention Credit (ERC) is not a tax credit available to employees. Rather, ERC was a federal tax credit available to eligible employers in 2020 and 2021 to incentivize them to maintain employees on their payroll during the COVID-19 Pandemic. The ERC provided up to $26,000 tax credit per employee for wages paid from March 2020 until October 2021.
As of July 2024, limited ERC funds may be claimed retroactively for tax returns filed in 2021. An employer’s eligibility to retroactively claim ERC turns on a factual analysis of a few primary factors, including but not limited to: (i) the type of employer; (ii) the impact of COVID-19 on the gross receipts of the employer during the relevant time period; and (iii) the time period in which wages are paid to employees.
Basic ERC Employer Eligibility Requirements
Qualification for and receipt of ERCs is based on several factors:
- time period in which qualified wages were paid;
- whether the employer is an “eligible employer;” and
- impact of COVID-19 on the employer.
How these characteristics are defined evolves with each statute.
Time Period in Which Qualified Wages Were Paid
Employer Eligibility Base on Entity/Organization Type
Determining Impact of COVID-19 on the Employer
Impact on Employer: Considerations for ERC in 2020
Under the CARES Act of 2020, an employer must have experienced (i) full or partial suspension of operations due to a government order due to COVID-19 during any quarter or (ii) a significant decline in gross receipts. In order for an employer to have satisfied the “significant decline” in gross receipts test in 2020, its gross receipts must have fallen below 50% of the gross receipts as compared to the same calendar quarter of 2019. If this threshold was met, the employer was considered eligible “beginning when gross receipts were less than 50% of gross receipts for the same calendar quarter in 2019 and ending in the first calendar quarter after the calendar quarter in which gross receipts were greater than 80% of the gross receipts for the same calendar quarter in 2019.” However, even if an employer did not satisfy the “significant decline” in gross receipts tests in 2020, it may have still qualified as an “eligible employer” under the “full or partial suspension of operations” test. Under the CARES Act of 2020, recipients of a Paycheck Protection Program (PPP) loan were ineligible for credit
Impact on Employer: Considerations for ERC in 2021
For each calendar quarter in 2021, the Relief Act of 2021 amended the definition of “significant decline” of gross receipts to include any quarter in which the employer’s gross receipts were “less than 80% of the same quarter in 2019.” In other words, as long as an employer’s gross receipts are down by at least 20% compared to the same calendar year in 2019, an employer satisfies the “significant decline” test for that quarter in 2021.
Additionally, “for calendar quarters in 2021, the alternative quarter election rule gives employers the ability to look at the prior calendar quarter and compare it to the same calendar quarter in 2019 to determine whether there was a gross decline in receipts.”
Lastly, small business recipients of Paycheck Protection Program (PPP) loans no longer ineligible for credit.
Impact on Employer: Important Changes for Q3 and Q4 of 2021
The American Rescue Plan Act of 2021 (ARPA) applies only to the third and fourth calendar quarters of 2021. ERC is available to “recovery startup businesses” that do not otherwise meet the eligibility criteria, as discussed above. “‘Recovery startup businesses’ are employers that: (i) began carrying on any trade or business after February 15, 2020; (ii) had average annual gross receipts under $1 million for the three taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined; and (iii) do not meet other eligibility criteria (full of partial suspension or decline in gross receipts).”
Impact on Employer: Additional Changes for Q4 of 2021
Under the Infrastructure Investment and Jobs Act 2021 (IIJA), ERCs previously available to all eligible employers for the fourth calendar quarter of 2021 are limited to recovery startup businesses only, as that term is defined in section 314(c)(5) of the Internal Revenue Code. For the fourth calendar quarter, “recovery startup businesses” may qualify for ERC even if they are otherwise an eligible employer due to full or partial suspension of operations or a decline in gross receipts.
Other Important Guidance for Employers
IRS Notices and Guidance related to ERC are applicable to the periods in which the qualified wages were paid. When considering whether an employer may be qualified to claim ERC for 2021, an analyst may consult the following resources:
For wages paid after December 31, 2020, and before July 1, 2021, the applicable guidance includes:
- Notice 2021-23
- Notice 2021-49
- Revenue Procedure 2021-33
For wages paid after June 30, 2021, and before October 1, 2021, the applicable guidance includes:
- Notice 2021-49
- Revenue Procedure 2021-33
For wages paid after September 30, 2021, and before Jan 1, 2022, the applicable guidance includes:
- Notice 2021-23
- Notice 2021-65
Potential Value of Available Employee Retention Credits
The total value of credit available is based on the number of employees and the wages actually paid to those employees. Maximum credit available varies with the time period in which wages were paid.
The number of employees for which ERC can be claimed is unlimited, unless the employer is a recovery startup business (in such case, the credit is capped at $50,000 per calendar quarter, regardless of number of employees).
Credit Available in 2021 under Relief Act of 2021
For each calendar quarter in 2021, 70% of qualified wages, capped at a maximum credit of $7,000 per employee, per quarter, is available. In other words, as long as an employee’s qualified wages were at least $10,000 in a given quarter in 2021, the employer may claim the full $7,000 in ERC per quarter in 2021 for that employee.
Wages considered to be “qualified wages” depends on the number of employees an employer has.
- For employers with “500 or fewer average full-time employees in 2019, wages paid to employees providing services AND NOT providing services are qualified wages.”
- For employers with “greater than 500 average full-time employees in 2019, wages paid to employees NOT providing services are qualified wages. “
Credit Available for Q3 and Q4 of 2021 under American Rescue Plan Act of 2021 (ARPA)
Under ARPA, the maximum ERCs available for Q1, Q2, and Q3 remain unchanged from the maximums implemented by the Relief Act. However, wages that may be considered “qualified wages” are expanded under ARPA for the third and fourth quarters of 2021. “For the third and fourth quarters of 2021, ‘severely financially distressed employers may treat all wages as qualified wages during the calendar quarter in which the employer is severely financially distressed. ‘Severely financially distressed employers’ are eligible employers with gross receipts that are less than 10% of the gross receipts in a calendar quarter as compared to the same calendar quarter in 2019.”
This modified definition of qualified wages for severely financially distressed employers applies to employers of all sizes. However, if an employer is not severely financially distressed, but was not in existence in 2019, that employer “may use the 2020 average number of full-time workers to determine whether the employer had greater than 500 average full-time employees” for the purpose of determining which wages paid to employers may be considered qualified wages.
Credit Available for Q4 of 2021 under Infrastructure Investment and Jobs Act of 2021 (IIJA)
Under IIJA, for the fourth calendar quarter of 2021, ERC is available only to recovery startup businesses. If an employer is a recovery startup business, the maximum credit available is capped at 70% of qualified wages per employee for the fourth quarter of 2021. Further, “rules relating to ‘severely financially distressed employers’ no longer apply in the fourth calendar quarter of 2021.”
Additional Considerations and Employment Tax Offset
Similar to the evolution of employer eligibility requirements as new statutes and regulations have been implemented, the source from which ERC is offset has changed over the years, and the offset is based on the year in which qualified wages were paid by the employer:
The ERC cannot exceed the payroll taxes withheld from employees’ paychecks. Any excess amounts can be carried forward to a future quarter. Employers should check with their state’s Department of Revenue for additional requirements or restrictions regarding the ERC. The ERC is not considered taxable income. This means employees will not have to pay additional taxes on wages the ERC covers. For employers, the ERC is treated as a business expense that can be used to offset taxes owed.
Process and Deadlines for Retroactively Claiming ERC for 2021
Eligible employers can still claim the ERC for eligible employees for 2021 by amending their tax filings. An employer may amend its filings for up to three years after filing or two years after paying, whichever is later. Therefore, ERC claims can be filed with respect to unclaimed credits for 2021 until April 15, 2025. Unclaimed credits for 2021 may be claimed by amending the employer’s federal tax return. This may be accomplished by filing a Form 941X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund). The employer must file a separate Form for each calendar quarter in 2021 for which an employer wishes to claim the credit. Errors or mistakes found can still be reported using this form. Employers are advised to utilize the assistance of a tax attorney or CPA to assist you in filling out and filing this form.
Mistakes and Pitfalls Frequently Encountered by Employers Seeking ERC
Common pitfalls include (i) incorrectly counting the average full-time employees and (ii) improper aggregation of employees (parent-subsidiary, brother-sister, affiliated groups, and so on). Business owners are prohibited from filing for the ERC on wages paid to relatives of a majority equity owner of a business. The IRS has reminded employers that improper filing and amendments may lead to fines, clawbacks, and other penalties.
Other common pitfalls include:
- Impermissible “double dipping” coverage of PPP loans and the ERC.
- Overapplication of the supply chain impact on operations. Supply chain argument may provide for eligibility only if (i) the supplier is S.-based; (ii) the supplier is under a full or partial suspension due to a domestic COVID executive order; and (iii) the supplier’s full or partial suspension is causing the business operations to experience a more than nominal effect.
- Misunderstanding and misapplication of “partial suspension” of
For an employer to be eligible under the “partial suspension” test, business operations subject to modifications due to a COVID governmental order, and the actual effect of those modifications, must be “more than nominal.” Unfortunately, the IRS does not define “nominal.”
Take Caution: Claiming ERC is a Popular Arena for Bad Actors
The IRS has issued warnings to employers to beware of third parties promoting improper ERCs. The ERC is complicated, and ill-informed or malicious third parties are taking advantage. Some third-party providers (“ERC Mills”) are guaranteeing businesses a refund without fully understanding the employer’s circ*mstances. The employer retains ultimate responsibility for proper filing and amending of taxes.
Third parties may not be aware of the common pitfalls discussed in this article. Third parties may neglect to inform businesses that wage deductions reported on the companies’ federal income tax returns must be adjusted to account for the credit amount. Employers should cautiously approach advertised schemes or direct solicitations that promise excessive tax savings, especially those that promise such savings without examining the employer’s records to determine eligibility. Incorrectly claiming the ERC may result in the credit being repaid plus penalties and interest.
Jeffrey S. Baird, JD, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm based in Texas with a national health care practice. He represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 or [emailprotected].
Kianna L. Sitarski, JD, is an attorney with the Health Care Group at Brown & Fortunato, PC, a law firm based in Texas with a national health care practice. She represents pharmacies, infusion companies, HME companies, manufacturers, and other health care providers throughout the United States. Ms. Sitarski can be reached at (972) 684-5788 or [emailprotected].
