The End of the Employee Retention Credit: How Employers Should Proceed

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The End of the Employee Retention Credit: How Employers Should Proceed

During the COVID-19 epidemic, small companies may claim a refundable tax benefit known as the Employee Retention Credit. It gave some assistance to struggling firms that retained staff on their payrolls even when government epidemic restrictions forced them to shut down or reduced their gross earnings.

However, President Biden’s signature on the Infrastructure Investment and Jobs Act (IIJA) on November 15, 2021, retroactively revoked most firms’ ability to claim an Employee Retention Credit (ERC) for salaries earned after September 30, 2021. Although the credit is no longer accessible, you still have time to file for the time periods it covered if you haven’t already.

Employers could (and still may) claim credits of up to $7,000 per employee every quarter during the first three quarters of 2021.

Key Takeaways

  • The original ERC allowed companies to claim a maximum credit of $10,000 per employee retained between March 13, 2020, and December 31, 2020.
  • Employers qualified if they were forced to shut down completely or partly, or if their gross revenues were less than 50% for the same quarter in 2019 (for 2020), and less than 80%. (for 2021).
  • Those who are not in business in 2019 may utilize the 2020 quarters.
  • The amended ERC, which became effective on March 27, 2020, also permitted businesses that got Paycheck Protection Program (PPP) loans to claim the ERC for eligible earnings that were not recognized as payroll expenditures in seeking PPP loan forgiveness.
  • The Consolidated Appropriations Act of 2021 (CAA) enlarged the ERC to cover salaries earned prior to July 1, 2021, and increased the maximum ERC to $7,000 per employee every quarter.
  • The ARPA (American Rescue Plan Act of 2021) expanded coverage to include earnings earned between July 1, 2021 and December 31, 2021.
  • The Infrastructure Investment and Jobs Act (IIJA) repealed the ERC for most enterprises after September 30, 2021.

Understanding the Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) was a refundable payroll tax credit for “qualified earnings” given to retained workers between March 13, 2020, and December 31, 2020. The Coronavirus Aid, Relief, and Economic Security Act (CARES)12 established it.

The ERC was designed to encourage firms to retain workers on the payroll even if they were not working during the covered period owing to the impacts of the coronavirus pandemic. The initial ERC was altered many times. It was eventually retrospectively terminated as of September 30, 2021, with the exception of starting recovery firms as specified by the Infrastructure Investment and Jobs Act (IIJA).3

On taxes filed in 2022, business owners may still claim the ERC for qualifying workers for all of 2020 and a portion of 2021. They have three years after filing or two years after paying to submit a Form 941X (Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund). Errors or inaccuracies discovered may still be reported using this form. 4

A Brief Chronology of the Employee Retention Credit

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 established a refundable employment tax credit for qualifying employers that pay qualified salaries and health plan expenditures.

This tax credit was originally offered from March 13, 2020, to December 31, 2020, for any employer whose company activities were entirely or partly interrupted owing to directives from a governmental body, as well as for other businesses who saw a substantial drop in gross revenues.

For that time period, the maximum ERC was $5,000 per employee. Subsequent laws amended and expanded the ERC’s provisions.

  • The Consolidated Appropriations Act of 2021 (CAA), which went into effect on December 27, 2020, extended the ERC to cover salaries earned before July 1, 2021, and increased the maximum ERC to $7,000 per employee every quarter. 5
  • The American Rescue Plan Act of 2021 (ARPA), which went into effect on April 1, 2021, expanded the coverage period to include salaries earned between July 1, 2021, and December 31, 2021. 6
  • Most recently, the IIJA’s retroactive cancellation of the ERC as of Sept. 30, 2021, impacts employers who expected to receive the ERC between Oct. 1 to Dec. 31, 2021. Only “recovery starting firms,” as defined by ARPA and updated by IIJA, are exempt. These businesses were eligible for the full ERC until December 31, 2021.
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According to US Code 3134(c)(5), a Recovery Startup Business is one that:7

  • Operations began on or after February 15, 2020
  • Maintains average yearly gross revenues of less than $1 million
  • Employs one or more people (other than the 50% owner)

What Repeal of the ERC Means to Your Business

The repeal date of the ERC, September 30, 2021, affects any firm that intended to obtain the credit in the fourth quarter of 2021. As a consequence, they may have lowered their tax payments or included in the projected credits in their quarterly budgets.

If they withheld payroll taxes in expectation of getting the ERC in the fourth quarter, they needed to assess any unpaid tax amounts and plan to settle them. 3

If You Received Advance Payments

If you got advance ERC payments for the fourth quarter of 2021 but did not qualify as a recovery starting firm, you may avoid “failure to pay” penalties if you reimburse the advance payments before the due date of your related employment tax return. 38

If You Reduced Employment Tax Deposits

Provided you decreased your tax deposits on or before Dec. 20, 2021, for wages earned during the fourth quarter of 2021 and are not a recovery startup firm, you will not be penalized for “failure to deposit” if all of the following conditions are met: 38

  • Based on the regulations in Notice 2021-24, you lowered deposits in anticipation of the Employee Retention Credit.
  • For salaries paid on December 31, 2021, you deposit the amount you originally kept on or before the relevant due date (the deposit due date will vary based on your deposit schedule)
  • The tax obligation arising from the expiration of your Employee Retention Credit is reported on the corresponding employment tax return or schedule for the period October 1, 2021 through December 31, 2021.

For further information on how to record the tax due, see the appropriate employment tax return instructions or schedule.

Failure to deposit penalties are not excused if you lower deposits after December 20, 2021 if you are not a recovery starting firm. 3

If You Were a Recovery Startup

If they satisfy certain conditions, qualified recovery starting enterprises may claim the ERC until December 2021. A recovery startup company is one that:

  • Operations began on or after February 15, 2020
  • Average yearly gross revenues of less than $1 million were maintained.
  • Employed one or more people (other than the 50% owner)
  • Has a gross yearly income of less than $1 million
  • Is not already eligible for ERC because of a halt in activities or a decrease in gross revenues

To be eligible for an ERC for Q4 2021, recovery starting enterprises have to follow all of the regulations in Notices 2021-20, 2021-23, and 2021-49 addressing CARES Act provisions that are the same as those found in Section 3134 of the Code.

How Employers Qualify for the Credit

The timeframe determines whether you are an eligible employer. The dates and qualifying conditions are shown below.

March 13, 2020, through Dec. 31, 2020

You must have operated on a trade or business, or been a tax-exempt organization, between March 13, 2020, and December 31, 2020.1

  • Was partly or completely halted as a result of COVID-19 instructions issued by an authorized governmental authority
  • Had a large COVID-19-related drop in gross revenues, defined as less than 50% of gross receipts in the comparable calendar quarter in 2019.
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The 2020 ERC was not open to government, state, or political subdivisions.

You were not qualified for the 2020 ERC for your earnings if you were self-employed. However, if you hired others, you may have been eligible for the ERC salaries paid to those workers.

Jan. 1, 2021, through Sept. 30, 2021

From January 1, 2021 to September 30, 2021, you must have operated on a trade or company or be a tax-exempt organization that:9

  • Was partly or completely halted as a result of COVID-19 instructions issued by an authorized governmental authority
  • Had a large COVID-19-related drop in gross revenues, defined as less than 80% of gross receipts in the comparable calendar quarter in 2019.

If you were not in business in 2019, you may use 2020 as your reference year for this time.

The 2021 ERC was not open to government, state, or political subdivisions. Tax-exempt public institutions, universities, and hospitals, on the other hand, were eligible.

Self-employed individuals were not eligible for the 2021 ERC for salaries. However, if they hired others, they may be eligible for ERC salaries made to those workers.

The “substantial drop in gross revenues” requirement applies whether or not your firm was impacted by COVID-19 in 2020 or 2021.

Oct. 1, 2021, through Dec. 31, 2021

From October 1, 2021 to December 31, 2021, the majority of employers did not qualify for the ERC.

Section 3134 of the Internal Revenue Code was changed by the Infrastructure Investment and Jobs Act. In the fourth quarter of 2021, the modification restricted the availability of the employee retention credit to recovery starting enterprises, as described in section 3134(c) (5).

Employee retention credits for salaries received after September 30, 2021 were not available to company owners who were not recovering starting enterprises.

What Wages Qualify for the Credit?

Depending on the year, the number of full-time workers you averaged in 2019 decided which employees you may claim for the credit.

Only pay for those retained who were not working might be claimed in 2020 if you averaged more than 100 full-time workers. However, if you had 100 or fewer employees, you may claim the salaries of all employees regardless of whether they were working or not. 10

The barrier for 2021 was increased to 500 full-time workers, which meant that if you hired more than 500 people, you could only claim the ERC for those who did not provide services. You may claim the ERC for all of your workers, working or not, if you had 500 or less. 9

CARES Act and the Credit

The CARES Act prohibited you from receiving the ERC for:2

  • Wages for which you earned a tax credit under the Families First Coronavirus Response Act for paid sick and family leave (Phase II)
  • Any salary you used to qualify for the paid family and medical leave credit under Internal Revenue Code section 45S
  • Wages given to specific relatives
  • Any employee for whom you received a Work Opportunity Tax Credit under Internal Revenue Code Section 51

The restriction was further expanded by the CAA of 2021 to salaries impacted by some additional credits, such as the Research Activities Credit, Indian Employment Credit, Credit for Employer Differential Wage, and Empowerment Zone Employment Credit. 1

The Employee Retention Credit was available to full-time and part-time employees whose companies completed the conditions. 2

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Amount of the Credit for 2020

The credit for 2020 was equivalent to 50% of up to $10,000 in qualifying earnings per employee (including amounts paid for health insurance) for all eligible calendar quarters commencing March 13, 2020, and ending December 31, 2020, with a maximum of $10,000 per eligible employee per year.

A qualifying period started in any quarter in which revenues were less than 50% of the corresponding quarter in 2019. It came to an end at the start of the first calendar quarter after the first quarter in which gross revenues exceeded 80% of gross receipts for that quarter in 2019.

The credit was entirely refundable and applied to your part of the employee’s Social Security taxes. This indicates that the credit acted as an overpayment and would be repaid to you when your portion of the taxes were deducted. 10

Amount of the Credit for 2021

The credit for 2021 was equivalent to 70% of up to $10,000 in qualifying pay per employee (including amounts paid for health insurance) for each eligible calendar quarter starting January 1, 2021 and ending September 30, 2021. This equates to a credit of up to $21,000 per employee ($7,000 every quarter).

The credit was entirely refundable and applied to your part of the employee’s Social Security taxes. This implies that the credit would function as an overpayment and would be reimbursed to you after deducting your portion of the taxes. 9

How to Get the ERC for Unforgiven PPP Loan Proceeds

If you acquired a PPP loan during the pandemic and had unforgiven sections, you may still claim the credits retroactively, but:11

  • The ERC cannot be claimed on PPP earnings used to repay PPP loans.
  • Some modifications may be necessary.
  • Your gross revenue must have decreased by 50% in 2020 and 20% in 2021 compared to the same quarter in 2019.
  • You must submit Form 941X within three years of filing or two years of paying the taxes, whichever comes first.

Who Qualifies for the Employee Retention Credit (ERC)?

Businesses who were forced to halt some or all activities owing to COVID-19 government limitations, or businesses that lost 50% of their total revenues from the same quarter the previous year, qualified for the ERC.

How Does Employee Retention Credit Work?

The ERC was a refundable tax credit offered to company owners for maintaining staff on their payrolls during the COVID-19 epidemic.

How Much Is the Employee Retention Credit Per Employee?

The ERC was $10,000 per employee for the year from March to December 2020. The ERC was $7,000 per employee per quarter from January to September 2021. The ERC remained the same for recovery startups from September to December 2021; the ERC has subsequently been disbanded.

The Bottom Line

The Employee Retention Credit was a refundable tax credit designed to assist small company owners in continuing to pay their staff during the COVID-19 epidemic. The credit was phased out at the end of 2021.

Employers may still apply for the credit from March 2020 until September 2021. Startup firms in recovery may file from March 2020 to December 2021.

Correction—September 20, 2022: An earlier version of this article left out the $10,000 yearly limit on the ERC from March 12, 2020 to December 31, 2020.

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