How to Handle the Loss of the Employee Retention Credit
The Infrastructure Investment and Jobs Act (IIJA) signed by President Biden on Nov. 15, 2021, retroactively eliminated the ability of most employers to claim an Employee Retention Credit (ERC) for wages paid after Sept. 30, 2021.
That meant that the maximum ERC per employee for most employers was $21,000, not $28,000, for the tax year 2021. And it’s zero for 2022.
- The original ERC gave employers a maximum credit of $5,000 per employee retained from March 13, 2020, to Dec. 31, 2020.
- Employers qualified if they were ordered to fully or partially shut down or if their gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021).
- Those who were not in business in 2019 could use the corresponding quarters from 2020.
- The updated ERC, retroactive to March 27, 2020, also allowed employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages not treated as payroll costs in obtaining forgiveness of the PPP loan.
- The Consolidated Appropriations Act, 2021 (CAA) extended the ERC to include wages paid before July 1, 2021, and expanded the maximum ERC to $7,000 per employee per quarter.
- The American Rescue Plan Act of 2021 (ARPA) extended coverage to include wages paid between July 1, 2021, and Dec. 31, 2021.
- Passage of the Infrastructure Investment and Jobs Act (IIJA) retroactively eliminated the ERC for most businesses after Sept. 30, 2021.
Understanding the Employee Retention Credit (ERC)
The Employee Retention Credit (ERC) was a refundable payroll tax credit originally for “qualified wages” paid to retained employees 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 employers to keep employees on the payroll even if they were not working during the covered period due to the effects of the outbreak of coronavirus. The original ERC was modified several times. Ultimately, it was retroactively halted as of Sept. 30, 2021, except for startup recovery businesses as defined by the Infrastructure Investment and Jobs Act (IIJA).
Business owners can still claim the ERC for eligible employees for all of 2020 and part of 2021 on taxes filed in 2022.
A Brief Chronology of the Employee Retention Credit
The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act provided a refundable employment tax credit for eligible employers paying qualified wages and health plan expenses.
This tax credit was originally available from March 13, 2020, through Dec. 31, 2020, for any employer whose business operations were fully or partially suspended due to orders from a governmental authority and to other employers who experienced a significant decline in their gross receipts.
The maximum ERC for that period was up to $5,000 per employee. Subsequent legislation modified and extended provisions of the ERC.
- The Consolidated Appropriations Act, 2021 (CAA), effective Dec. 27, 2020, extended the ERC to include wages paid before July 1, 2021, and expanded the maximum ERC to $7,000 per employee per quarter.
- The American Rescue Plan Act of 2021 (ARPA), effective April 1, 2021, extended the coverage period to include wages paid between July 1, 2021, and Dec. 31, 2021.
- Most recently, the retroactive repeal of the ERC by the IIJA as of Sept. 30, 2021, affects employers that anticipated receipt of the ERC for Oct. 1 through Dec. 31, 2021. The sole exception is for “recovery startup businesses” as defined by ARPA and amended by IIJA. Those companies were eligible to receive the full ERC through Dec. 31, 2021.
Recovery Startup Business Definition
A Recovery Startup Business as defined by U.S. Code 3134(c)(5) is one that:
- Began operations on or after Feb. 15, 2020
- Maintains average annual gross receipts that do not exceed $1 million
- Employs one or more employees (other than 50% owners)
What Repeal of the ERC Means to Your Business
The repeal of the ERC as of Sept. 30, 2021, affected any business that had expected to receive the credit during the fourth quarter of 2021. They may have reduced their tax deposits or accounted for the expected credits in their budgets for the quarter.
If they held back payroll taxes in anticipation of receiving the ERC in the fourth quarter, they needed to determine any underpaid tax amounts and prepare to resolve those issues.
If You Received Advance Payments
According to IRS guidance, if you received advanced ERC payments for the fourth quarter of 2021 and did not qualify as a recovery startup business, you can avoid “failure to pay” penalties if you repay the advance payments by the due date of your applicable employment tax return.
If You Reduced Employment Tax Deposits
If you reduced your tax deposits on or before Dec. 20, 2021, for wages paid during the fourth quarter of 2021, and are not a recovery startup business you will not be subject to a “failure to deposit” penalty if:
- You reduced deposits in anticipation of the Employee Retention Credit based on rules in Notice 2021-24 PDF, and,
- You deposit the amount you initially retained on or before the relevant due date for wages paid on Dec. 31, 2021 (Deposit due date will vary based on your deposit schedule), and,
- You report the tax liability resulting from the termination of your Employee Retention Credit on the applicable employment tax return or schedule that includes the period from Oc. 1, 2021, through Dec. 31, 2021.
You can refer to the instructions for the applicable employment tax return or schedule for additional information on how to report the tax liability.
If you are not a recovery startup business, failure to deposit penalties are not waived if you reduce deposits after Dec. 20, 2021.
How Businesses Qualified for the ERC
Whether you qualified as an eligible employer depends on the time period in question.
March 13, 2020, through Dec. 31, 2020
For the period from March 13, 2020, through Dec. 31, 2020, you must have carried on a trade or business or you must have been a tax-exempt organization that:
- Was partially or fully suspended due to COVID-19 orders from an appropriate governmental authority
- Experienced a significant COVID-19-related decline in gross receipts, defined as less than 50% of gross receipts for the same calendar quarter in 2019
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 own wages. But if you employed other people, you may have qualified for the ERC wages paid to those employees.
Jan. 1, 2021, through Sept. 30, 2021
For the period from Jan. 1, 2021, through Sept. 30, 2021, you must have carried on a trade or business or were a tax-exempt organization that:
- Was partially or fully suspended due to COVID-19 orders from an appropriate governmental authority
- Experienced a significant COVID-19-related decline in gross receipts, defined as less than 80% of gross receipts for the same calendar quarter in 2019
For this period, If you were not in business in 2019 you could use 2020 as your comparison year.
Government and state entities and political subdivisions weree not eligible for the 2021 ERC. However, tax-exempt public colleges, universities, and hospitals were eligible.
Self-employed people were not eligible for the 2021 ERC for their own 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.
Oct. 1, 2021, through Dec. 31, 2021
For the period from Oct. 1, 2021, through Dec. 31, 2021, most employers did not qualify for the ERC.
That’s because the Infrastructure Investment and Jobs Act amended Section 3134 of the Internal Revenue Code to limit the availability of the employee retention credit in the fourth quarter of 2021 to recovery startup businesses, as defined in section 3134(c)(5).
Business owners who were not recovery startup businesses were not eligible for the employee retention credit for wages paid after Sept. 30, 2021.
Other Qualification Standards
The CARES Act prohibited you from receiving the ERC for:
- Wages for which you received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act (Phase II)
- Any wages you counted as part of the credit for paid family and medical leave under section 45S of the Internal Revenue Code
- Wages paid to certain relatives
- Any employee for whom you were granted a Work Opportunity Tax Credit under Section 51 of the Internal Revenue Code
Under the CAA of 2021, the prohibition was also extended to wages affected by certain other credits, including the Research Activities Credit, Indian Employment Credit, Credit for Employer Differential Wage, and Empowerment Zone Employment Credit.
The number of full-time employees you averaged in 2019 determined which employees you could claim for the credit, depending on the year.
For 2020, if you averaged more than 100 full-time employees, only wages for those you retained who are not working could be claimed. If you had 100 or fewer workers, you could claim wages for all employees whether or not they are 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 who are not providing services. If you have 500 or fewer employees, you could claim the ERC for all of them, working or not.
The Employee Retention Credit applied to workers employed on a full-time or part-time basis if their employers met the necessary requirements.
Amount of the Credit for 2020
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. This works out to a maximum credit of $5,000 per employee for the period.
A qualifying period begins in any quarter where receipts are less than 50% of receipts in the same quarter in 2019 and ends at the beginning of the first calendar quarter after the first quarter in which gross receipts are 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.
Amount of the Credit for 2021
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 June 30, 2021. This works out to a maximum credit of $14,000 per employee ($7,000 per quarter) for the period.
The credit was applied to your portion of the employee’s Social Security taxes and was fully refundable. This means that the credit would serve as an overpayment and be refunded to you after subtracting your share of those taxes.
How to Get the ERC for Unforgiven PPP Loan Proceeds
The fact that you received a PPP loan in 2020 or a PPP2 loan in 2021 did not preclude you from claiming the ERC for qualified wages that were not counted as payroll costs to obtain forgiveness of all or part of your PPP loan.
Further, if you included wages paid in Q2 and/or Q3 of 2020 on your forgiveness request and your request was denied, you could have claimed those wages on your Q4 2020 Form 941, due Jan. 31, 2021.
Importantly, you did not have to use this limited 4th quarter procedure. You could instead choose the regular process of filing an adjusted return or claim for refund for the appropriate quarter to which the additional ERC relates using Form 941-X.
How to Get the ERC for Wages Paid in Q1-Q3 2021
The process for obtaining the ERC for 2021 is similar to that outlined for 2020 above. Be sure to take into account changes enacted by the CAA and outlined above, including the fact.
Just like in 2020, you could obtain your ERC for Q1 through Q3 of 2021 by reducing your employment tax deposits. If you qualified as a small employer (500 or fewer full-time employees in 2019), you may request advance payment of the credit using Form 7200, Advance of Employer Credits Due to COVID-19.
In 2021, advances were not available for employers with more than 500 employees.
How to Get the ERC for Wages Paid in Q4 2021
Most businesses did not qualify to receive an ERC for the fourth quarter of 2021. The exception is a category known as recovery startup businesses. These are businesses that:
- Began operations on or after Feb. 15, 2020;
- Maintained average annual gross receipts that do not exceed $1 million; and
- Employed one or more employees (other than 50% owners).
In order to claim an ERC for Q4 2021, recovery startup businesses had to comply with all the rules in Notice 2021-20, Notice 2021-23, and Notice 2021-49 addressing CARES Act provisions that are the same as those provided under Section 3134 of the Code.
It’s Not Too Late to Get the ERC
Employers can not claim Employer Retention Credits for any wages paid after the end of December 2021.
If you have not yet claimed (or incorrectly claimed) an ERC for qualified wages paid anytime between March 13, 2020, and Sept. 30, 2021 (Dec. 31st, 2021) for recovery startup businesses) you may still obtain the ERC by amending your quarterly employment tax return (amended Form 941-X) for the appropriate quarter(s).
Can Employers Still Claim the Employee Retention Credit (ERC)?
Employers can retroactively claim the ERC for the periods during which it was effective if they failed to claim them previously.
The ERC was retroactively discontinued by the Infrastructure Investment and Jobs Act (IIJA) as of Oct. 1, 2021, except for recovery startup businesses, which got until Dec. 31, 2021. However, you can file an amended quarterly employment tax return (Form 941-X) for any period for which you qualified but did not claim the ERC.
Can You Only claim the ERC for Full-Time Employees?
No. The average number of full-time employees you had during the period determined the number of credits you could claim, but full-time and part-time status could be eligible.
Do Health Benefits Count as Qualifying Wages for the ERC?
Yes. Both regular wages and health benefits counted as qualifying wages for purposes of calculating the ERC.