What Is The ERC Tax Credit?
Updated March 22, 2024 at 10:56 am
In 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) established the Employee Retention Credit (ERC). The ERC is a refundable tax credit for employers, meant to help employers keep employees on payrolls. The credit was later amended by further legislation, expanding both the credit’s eligibility window and the amount small business owners can claim. Generally, certain employers who experienced a government-imposed COVID-19-related shutdown or a drop in receipts can claim this credit.
If your business qualified for the ERC, but did not claim it when it filed tax returns for 2020 and 2021, you can still claim the credit by filing an amendment. But beware of tax credit scams looking to entice you into submitting a false claim for the credit.
Here’s what you need to know about the Employee Retention Credit.
Vault’s Viewpoint
- The ERC helps businesses that experienced a government shutdown during the COVID-19 pandemic or a significant drop in gross receipts.
- The ERC provides a refundable tax credit for a percentage of qualified wages paid between March 13, 2020 and December 31, 2021.
- Through the end of 2023, the IRS has paused processing new ERC claims due to scams enticing employers to submit ERC claims when they are not eligible.
What Is the Employee Retention Credit (ERC)?
The Employee Retention Credit (ERC) is a refundable tax credit that was designed to provide relief to employers who kept employees on payroll during the COVID-19 pandemic. It is meant to subsidize employee wages for employers whose business was impacted by the pandemic, either because their business was shut down by government order or because of a decline in gross receipts.
Businesses may be able to claim the ERC if they experienced an eligible shutdown or decline in receipts and paid employee wages after March 12, 2020, and before January 1, 2022.
In response to aggressive marketing enticing ineligible taxpayers to submit ERC claims, the IRS issued a temporary moratorium on processing claims on September 14, 2023. This pause will run through at least December 31, 2023.
How Does the ERC Work?
The Employee Retention Credit is the result of four pieces of legislation. It was established by the CARES Act in March 2020. It was then amended by the 2020 Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act), the 2021 American Rescue Plan (ARPA) Act and the 2021 Infrastructure Investment and Jobs Act (IIJA).
The CARES Act established the ERC and provided the initial eligibility requirements. For employers who paid qualified wages from March 13, 2020, until December 31, 2020:
- The business must have experienced at least a partial suspension of operations due to a government order related to COVID-19 or a significant decline in gross receipts.
- Up to 50% of qualified wages up to $10,000 per employee per year are eligible for credits.
- Maximum credit of $5,000 per employee in 2020.
The ERC was amended and extended by the Relief act and ARPA in 2021. For employers who paid qualified wages from January 1, 2021 until September 30, 2021:
- The business must have experienced at least a partial suspension of operations due to a government order related to COVID-19 or a significant decline in gross receipts.
- Up to 70% of qualified wages up to $10,000 per employee are eligible for credits.
- Maximum credit of $7,000 per employee per quarter in 2021.
Finally, IIJA changed eligible requirements retroactively for the fourth quarter of 2021. Only recovery startup businesses that paid qualified wages from October 1, 2021, until December 31, 2021 are eligible for the ERC.
Who Is Eligible for the Employee Retention Tax Credit?
If you are a business or tax-exempt organization that paid qualified wages to employees between March 12, 2020 and January 1, 2022, you may be eligible for the ERC. The exact amount you are eligible to receive will vary depending on the pandemic impact to your business, the number of employees you had on payroll and the amount of wages paid.
In most cases, businesses must have experienced a shutdown or decline in revenue to qualify for the ERC. If your business was shut down by a government order related to the COVID-19 pandemic or if your business experienced a decline in your gross receipts during 2020 or the first three calendar quarters of 2021, you may qualify. If your business qualifies as a recovery startup business, you may also qualify for the Employee Retention Credit for the fourth quarter of 2021.
The IRS provides an Employee Retention Credit eligibility checklist that can be helpful in determining your eligibility for this credit.
How To Get the ERC
If you didn’t claim the ERC when you filed your original employment tax return, you must file an adjusted employment tax return to claim the credit. What kind of business you are and whether you file taxes quarterly or annually will determine which form you use.
- Quarterly filers use Form 941-X, April 2023 Revision
- Annual filers use Form 943-X
- If you are an agricultural employer, use Form 943-X
- If you are a railroad employer, use Form CT-1X.
Beware of Scams
The IRS advises many unscrupulous businesses are trying to make money by enticing employers into falsely claiming an ERC and paying a fee for tax advisory services. These scams usually involve unsolicited contacts or ads on radio, TV and social media. Some ads may be constructed to appear like official government letters or notices.
In many cases, the companies promoting these scams collect upfront fees, pressure you to accept a refund anticipation loan or collect a percentage of the amount of your credit. In some cases, these scams may use your information to steal your identity if you send a form to them rather than the IRS.
The IRS advises taxpayers to be on the lookout for signs of aggressive ERC marketing:
- Unsolicited contacts regarding the ERC.
- Promises to determine your ERC eligibility simply and quickly.
- Requests for upfront fees or pressure to initiate a refund anticipation loan.
- Fee schedules based on a percentage of the Employee Retention Credit or expected refund amount.
- Blanket statements that you qualify for the credit, made without knowledge of your tax situations.
- Pressure to submit claims that you may not be eligible for.
Finally, be aware that you will be required to pay back an incorrectly claimed ERC and you could be subject to penalties and interest.
Frequently Asked Questions
Who Qualifies for the Employee Retention Credit?
Generally, a business qualifies for the Employee Retention Credit if it paid qualified wages in 2020 and 2021 and either experienced a government-imposed COVID-19-related shutdown in those years or its gross receipts dropped significantly. The IRS website offers an eligibility tool that allows employers to check if they may be eligible for the ERC.
Is Employee Retention Credit Still Available in 2023?
The Employee Retention Credit applies only to tax years 2020 and 2021. If you did not claim the ERC when you originally filed your business tax returns in those years, you can claim the credit by filing an amended return.
Is the IRS Warning About ERC?
The IRS warns of widespread aggressive advertising and scams related to the ERC. Scammers entice business owners to pay a fee for assistance in improperly submitting a claim for the ERC. The IRS has imposed a temporary moratorium on new ERC claims due to an influx of improper ERC claims.
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