2021 Employee Retention Credit FAQ

Have questions about the employee retention credit (ERC)? You’re not alone. Many business owners have inquiries, so we’ve put together a 2021 Employee Retention Credit FAQ list. When it comes to the ERC, staying up to date on the latest tax laws and regulations can get complicated. Read on for simplified answers to common ERC questions.

What is the employee retention credit?

The ERC is a broad-based refundable tax credit expanded at the end of 2020 and broadened further by the American Rescue Plan Act in 2021. It is designed as a payroll tax credit to be calculated and claimed on Form 941 with the purpose of encouraging employers to keep employees on their payroll.

How do I qualify for the employee retention credit?

The credit is available to all employers regardless of their size, including tax-exempt organizations. There are just a couple of exceptions:

1. State and local governments and their instrumentalities 
2. Certain small businesses who take small business loans

To qualify, employers have to meet one of two tests for 2020 and the first two quarters of 2021, or one of three tests for the third quarter of 2021:

1. The employer’s business was fully or partially suspended by government order due to COVID-19 during the calendar quarter. 
2. The employer’s gross receipts were 50% or below compared to the comparable quarter in 2019 for 2020, or 20% or below for 2021. 
3. For the third quarter of 2021, if a business is a recovery startup (i.e., it began operations after February 15, 2020) and had gross receipts less than $1M for 2020, it may qualify for a special credit.

Once the employer’s gross receipts go above 80% of a comparable quarter in 2019, they no longer qualify after the end of that quarter. However, for 2021, the company may elect to compare to an alternative quarter and compare that quarter instead. They do not qualify for the credit in the quarter after the quarter in which gross receipts exceeded 80% of the comparable quarter. 

These tests are independently calculated each quarter.

Watch Now: What’s the difference between tax projections and tax planning?

Is there a deadline to claim the ERC credit?

The infrastructure Investment and Jobs Act approved on November 5, 2021, retroactively ended the ERC as of October 1, 2021. This reduces the maximum credit available to businesses from $28,000 to $21,000 per employee per year. The credit can still be claimed for 2021 using amended Form 941.

How much can I claim for the ERC credit?

For 2021, eligible employers can get a credit equal to 70% of qualifying wages per quarter, but only for the first three quarters of the taxable year. Quarter four became retroactively ineligible with the passage of the infrastructure bill. The maximum credit per quarter is $7,000 per employee, or $21,000 per employee per year.

How do I determine if my business is small or large?

For 2020 credits, to be eligible as a small business, you must have 100 or fewer average full-time employees. In 2021, that number was raised to 500 or fewer full-time employees, expanding the number of “small” businesses.

Can I claim the ERC as an S corporation or C corporation owner? Which business entities are eligible?

If you are a majority owner receiving wages, you are not considered an employee of the company and your wages are therefore ineligible. The IRS made clear that wages to majority shareholders do not qualify for the ERC. If you are a shareholder owning less than 2% of the company and an employee, you may qualify as an employee for the credit.

Is the ERC refund taxable?

Yes and no. The refund itself is not included in gross income, but the wages used to calculate the credit are not eligible as an expense deduction. Those wages will still be included in the business’s taxable income. So while the credit itself is not taxable, you do lose out on that expense deduction.

If the employee’s wages exceed $10,000 in a quarter, can I roll that amount over to the next quarter?

No, it’s based on payroll expenses per quarter, so any wages paid in excess of the first qualifying $10,000 can not be carried over to the next quarter. However, different wages may be used for different credits.

Should I apply as much as possible (rent, etc.) against the PPP loan to maximize the ERC for remaining wages?

That’s a determination each business has to make individually. It could be a good strategy for some. If you want to leverage PPP loans against other expenses in order to take more credit, that can be a great planning strategy. Many businesses have used both employee retention credit and PPP loans.

How do I determine if my business experienced a government shutdown?

It’s usually determined by what your state did. A lot of the shutdowns were state-mandated, so generally speaking, if a governmental order changed the way you could do business, that qualifies. In some cases, you may have only experienced a partial shutdown (for instance, a doctor’s office or a grocery store that was considered an essential business) if you were able to continue operations but in a reduced capacity.

What is the deadline to amend with the ERC?

The deadline to amend will be between three to five years, depending on the business type.

Does “experience” mean the shutdown impacted the business’s customers?

No, the shutdown experience only relates to how mandatory closures impacted your business. However, if customers were impacted and didn’t shop, that would have affected your sales and may qualify you for the ERC due to loss of revenue.

If my business is in more than one location, and one location had a shutdown but the other did not, will only the wages in the shutdown location count?

If the business implemented certain measures across multiple jurisdictions, they are considered to have suffered a partial shutdown and are an eligible employer in all jurisdictions. The employer may still be eligible as well under the gross receipts test.

Are companies that never received first draw PPP loans, but then received second draw PPP loans, eligible for the ERC? Does it matter which PPP loan a business received?

No. If you received a first draw loan, a second draw loan or more than one loan, your eligibility does not change. However, any wages paid for using forgiven PPP loan funds will not be considered “qualified wages” for purposes of claiming the credit.

If a shutdown ends mid-quarter, how does that impact my eligibility?

If a business qualifies solely due to a government shutdown, and the shutdown ends before the end of the quarter, only those wages paid to employees during the period of shutdown are considered qualified wages.

What counts as a partial shutdown?

A business is considered to have suffered a partial shutdown (or, more accurately, a partial suspension of business) if it is able to continue some but not all of its typical business operations due to COVID-19 restrictions. For instance, a restaurant that was able to remain open but could only offer pick-up or delivery food options due to a governmental order would have suffered a partial shutdown.

What tax is the credit calculated against?

The taxpayer is given a credit against the employer portion of certain payroll taxes. For 2020 and the first two quarters of 2021, the credit is for the employer portion of social security taxes, which is 6.2%. Since social security wages are limited to $142,500, the most an employer will owe per employee per year is $8,835. Any amount of the credit in excess of the tax liability will be refundable to the employer. 

For the third quarter of 2021, the credit is against the employer portion of the hospital tax, which is 1.45%. Unlike the social security portion, there is no wage limitation. Again, any amount of the credit in excess of the tax liability is refundable to the employer.