This page will be updated as new guidance comes out. Originally published 04/25/2021. Last updated 11/14/2021.

Employee Retention Credit (ERC) is a Covid-Relief program that gives eligible businesses up to $26k for each employee on payroll. It was expanded as part of the American Rescue Plan Act (03/11/2021) and then shortened as part of the “Infrastructure Bill” (11/05/2021).

Table of Contents

• Eligible Businesses
• How Much Can You Get
• How to Get the Funds
• 2021 Guidance
  • Eligibility #1 – Government Shutdown
  • Eligibility #2 – 20% Reduction
  • Eligibility #3 – Startup Business
• 2020 Guidance
• Further Details
  • Paying Self & Relatives
  • Overlapping Programs – PPP vs FFCRA vs ERC
  • Severely Distressed Employers
• Links

Eligibile Businesses

Employee Retention Credit (ERC) is for businesses, and non-profits, with payroll. Self-employed people are not eligible for their own self-employed earnings. However, if the self-employed person has employees on payroll, they may be eligible for ERC for wages paid to the employees.

How Much Can You Get

• 2020 Payroll: Up to $5k per employee
• 2021 Payroll: Up to $21k per employee, up to a maximum of 70% of wages paid per employee.

How to Get the Funds

Work with your payroll provider. You apply for the credit on your quarterly payroll reports (941). The credit reduces the payroll taxes that you owe. If your credit is more than what you have to pay, then you will get a refund for the remaining amount. You can also amend filed 941s if you want to get the credit from previous quarters.

Businesses with up to 500 employees can also request an advance (form 7200), so you get the money before filing your quarterly reports. You can get an advance of 70% of the average wages in 2019 (up to a maximum of $7,000 per employee).

2021 Guidance

Many more businesses are eligible for quarters in 2021 than for quarters in 2020.

Eligibility for each calendar quarter (Jan-Mar, Apr-Jun, Jul-Sep) are looked at separately. So you can be eligible for 1, 2, 3 quarters. Eligible Startup Businesses can also be eligible for the 4th quarter of 2021 (Oct-Dec).

For any quarter that a business is eligible, it can get 70% back of up to $10,000 in wages and healthcare costs per employee. That’s up to $7,000 per employee per quarter.

A business is eligible if:

1. It experienced a full or partial shutdown due to government regulations
   OR
2. It experienced 20% or more decline in gross receipts.
   OR
3. For 3rd and 4th quarter 2021: ‘Startup Business’ are eligible even without either of the above 2 requirements. See ‘Startup Business‘ for more details.

Eligibility #1 – Government Shutdown

“The operation of the employer’s trade or business is fully or partially suspended due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 19”

Businesses can potentially be eligible even if the business was open the entire quarter – reach out for more guidance.

Eligibility based on a government shutdown order is for the first three quarters of 2021. Although the 4th quarter (Oct-Dec) was originally also eligible, the Infastructure Bill (Nov 5, 2021) ended ERC for any non-startup business on 09/30/2021.

See FAQ re shutdown eligibility here.

Eligibility #2 – 20% Reduction

A business is eligible if it had a 20% decline in gross receipts in the quarter for which it is claiming the credit compared to the same quarter in 2019. Each quarter (3 months) is looked at separately. See below for details and exceptions depending on each quarter.

Eligibility based on a 20% reduction is for the first three quarters of 2021. Although the 4th quarter (Oct-Dec) was originally also eligible, the Infastructure Bill (Nov 5, 2021) ended ERC for any non-startup business on 09/30/2021.

Note that PPP, SVOG, and RRF grants should not be included in gross receipts (IRS – 8/10/2021)

• Third quarter of 2021 (July-September 2021)
  Any business is eligible if it had either:
  • 20% reduction in the third quarter of 2021 compared to the third quarter of 2019
    If the business was not in operation at the beginning of the third quarter in 2019, then the decline is compared to the third quarter in 2020 instead
    OR
  • 20% reduction in the second quarter of 2021 compared to the second quarter of 2019
    If the business was not in operation at the beginning of the second quarter in 2019, then the decline is compared to the second quarter in 2020 instead
    
    – A startup business is eligible for this quarter even if it did not have a 20% reduction.
    – If the business was even partially suspended due to Covid 19, it may be eligible even if it did not have a 20% reduction. See ‘Eligibility #1‘ for more.
    
• Second quarter of 2021 (April-June 2021)
  The business is eligible if it had either:
  • 20% reduction in the second quarter of 2021 compared to the second quarter of 2019
    If the business was not in operation at the beginning of the second quarter in 2019, then the decline is compared to the second quarter in 2020 instead
    OR
  • 20% reduction in the first quarter of 2021 compared to the first quarter of 2019
    If the business was not in operation at the beginning of the first quarter in 2019, then the decline is compared to the first quarter in 2020 instead
    
    – If the business was even partially suspended due to Covid 19, it may be eligible even if it did not have a 20% reduction. See ‘Eligibility #1‘ for more.

• First quarter of 2021 (January-March 2021)
  The business is eligible if it had either
  • 20% reduction in the first quarter of 2021 compared to the first quarter of 2019
    If the business was not in operation at the beginning of the first quarter in 2019, then the decline is compared to the first quarter in 2020 instead
    OR
  • 20% reduction in the last quarter of 2020 compared to the last quarter of 2019
    If the business was not in operation at the beginning of the last quarter in 2019, then the business is only eligible with option #1
    
    – If the business was even partially suspended due to Covid 19, it may be eligible even if it did not have a 20% reduction. See ‘Eligibility #1‘ for more.

Eligibility #3 – Startup Business

Startup Businesses are eligible to get ERC for the 3rd and 4th quarters of 2021.

If a business meets both of the following conditions, it can be considered a Startup Business.

1. Began operations after February 15, 2020
2. Average annual gross sales for the prior three taxable years not more than $1,000,000

Any startup business can be eligible for ERC even if doesn’t have any reduction or forced government closure. The maximum a “startup business” can get from ERC is $50,000 per quarter. The credit may only be for the 3rd and 4th quarters of 2021.

If the startup business is eligible due to a reduction or government closure, then it is not limited by the $50k maximum (as its eligibility is not due to being a startup business, rather due to standard eligibility). In short: The $50k max applies if the only reason the business is eligible is due to being a startup business.

2020 Guidance

For 2020, the Employee Retention Credit (ERC) is a tax credit against certain payroll taxes, including an employer’s share of social security taxes for wages paid between March 12, 2020, and December 31, 2020. The tax credit is 50% of the wages paid up to $10,000 per employee, capped at $5,000 per employee.

You must first show a 50% reduction in gross receipts compared to the same quarter in the previous year, then you continue to be eligible for the following quarters as long as you had at least a 20% reduction in gross receipts.

For example, if in Q3 of 2019 you had $100,000 in gross receipts, then in Q3 2020 you had $50,000 in gross receipts, you are eligible for ERC in Q3 2020. Then, as long as your Q4 2020 gross receipts were 20% less than Q4 2019, you are eligible for ERC in Q4 2020. So if you had $100,000 gross receipts in Q4 of 2019 and $75,000 gross receipts in Q4 2020, you would still be eligible, even though it is less than a 50% reduction – because you already became eligible the previous quarter.

More details for 2020 credits here.

Further Details

Paying Self & Relatives

Here are the relatives of a 50%+ owner that are not eligible for ERC:

• A child or a descendant of a child;
• A brother, sister, stepbrother, or stepsister;
• The father or mother or an ancestor;
• A stepfather or stepmother;
• A niece or nephew;
• An aunt or uncle;
• A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

This list did not clarify if a 50%+ owner (S and C Corporation) or their spouse (on payroll) is eligible for Employee Retention Credit. On August 4, they clarified that 50%+ owners and spouses are eligible for their own payroll only if the 50%+ owner doesn’t have any living sibling (including half-sibling), parent, grandparent, child, or grandchild. If the 50%+ shareholder has a living relative as per the list above, the 50%+ owner and spouse are not eligible for ERC credits

Large Businesses (over 500 employees)

There are special rules for large businesses. “Business size” for ERC is determined by its average full-time employee count in 2019.

• Less than 500 employees: If your business averaged less than 500 full-time employees in 2019, then you can claim ERC whether or not workers actually worked during an eligible quarter.
• 500+ employees:
  • Less than 90% reduction in gross receipts: If your business averaged 500+ full-time employees in 2019, then you can only claim ERC for workers that did not work during that eligible quarter.
  • More than 90% reduction in gross receipts: Such a business is considered a “severely distressed employer” and is treated just like a business with less than 500 employees in regards to ERC. So, if a business with more than 500 employees had a 90% reduction in gross receipts, then they are eligible by using the same rules as above for checking each quarter, just use 90% instead of 20%.

Overlapping Programs – PPP vs FFCRA vs ERC

Speak to your accountants. Here is our basic understanding of the issue with overlapping programs.

PPP: You can get ERC even if you got PPP – but you can’t “double-dip”. So if you paid payroll using PPP funds, you can’t then go ahead and claim ERC for the very same funds. For example, if you paid an employee $20,000 in a quarter and “used” $10,000 to get $7,000 in credits, then you can use PPP funds for the other $10,000, not for the full $20,000.

FFCRA: Same logic applies here. You can apply for both ERC and FFCRA, as long as it’s reimbursing different money. You can’t get reimbursed by both ERC and FFCRA for the same paycheck. If an employee is off work and you paid the employee and are reimbursed with FFCRA funds, then you can’t claim ERC for that same money.

Links

• IRS Guidance for the first two quarters of 2021
• IRS Guidance for the last two quarters of 2021 – Plus further guidance
• IRS FAQ (not updated as of 04/25/2021)
• Info from the Treasury