The Employee Retention Tax Credit (ERC): What Small Businesses Need to Know

What Is It?

• The ERC is a refundable and advanceable tax credit for small businesses based on the number of qualifying employees.
• If eligible, businesses can claim the ERC for qualifying wages paid during March 13, 2020 – September 30, 2021.
  • This means the credit is available for wages paid in the following quarters:
    • 2020 – Final few weeks of Q1. Fully for Q2, Q3, and Q4
    • 2021 – Q1, Q2, Q3, and Q4.

Do I Qualify?

To qualify for the ERC in a given 2020 quarter, a business must have experienced either:

1. At least a 50% decline in gross receipts in a given quarter compared to the same quarter in 2019. OR
2. A full or partial suspension of business operations due to a government order.

To qualify for the ERC in a given 2021 quarter, a business must have experienced either:

1. At least a 20% decline in gross receipts in either:
   1. A given quarter compared to the same quarter in 2019; OR
   2. The immediately preceding quarter.
2. OR A full or partial suspension of business operations due to a government order.

For Q3 and Q4 of 2021 only, a business can utilize either of these special qualifying criteria:

Qualify as a Recovery Startup Business****, meaning the employer:

• Began operations after February 15, 2020,
• The average annual gross receipts of the employer for the 3-year taxable period preceding the calendar quarter claiming the credit does not exceed $1,000,000, AND
• Does not qualify under the gross receipts or suspension of operations criteria above.

• A Recovery Startup Business is eligible for a maximum of $50,000 per quarter.

Qualify as a Severely Financially Distressed Employer, meaning the employer:

• Suffered at least a 90% decline in gross receipts in a specific quarter compared to the same quarter in 2019.

• A Severely Financially Distressed Employer can include all wages paid during the qualifying quarter for purposes of the ERC.

How Much Is It?

• 2020 → Maximum credit is $5,000 per employee for the entire year. 50% of qualifying wages with a maximum qualifying wage amount of $10,000 per employee.
  • 50% x 10,000 = $5,000 credit per employee

• 2021 → Maximum credit is $7,000 per quarter, per employee – $21,000 total for the year. 70% of qualifying wages with a maximum qualifying wage amount of $10,000 per employee.
  • 70% x 10,000 = $7,000 credit per employee, per quarter.

• Total → Up to $26,000 per employee!!

***If your business had over 100 full time employees in 2020, or over 500 in 2021, then you need to be aware that the ERC only applies to employees not working but continuing to get paid.

****Recovery Startup Business are the only of small business that is eligible for ERC on Q4 2021 wages. 

How to Claim It?

• For 2020 and past quarters:
  • File an amended quarterly tax return, Form 941-X, and receive a check refund
• For upcoming or current quarters:
  • Claim on quarterly tax return Form 941 and either reduce payroll deposits in anticipation of quarterly tax filing, receive a check after filing, or carry forward the credit to a future quarter and reduce those payroll deposits
  • Claim on Form 7200 and receive an advance of funds

Step-By-Step Process

1. Determine whether you qualify for the ERC in any 2020 or 2021 quarter through the gross receipts reduction test (50% for 2020 and 20% for 2021)
   1. The gross receipts qualifying test is the most business friendly → If you qualify via a reduction in gross receipts, you will AUTOMATICALLY qualify for the following quarter and every subsequent quarter until gross receipts reach 80% of comparable 2019 quarter levels.

   If not, determine if you qualify based on the suspension of operations test, or alternatives mentioned in the “Do I Qualify?” section.

2. Determine qualifying wages in your qualifying quarter/s.
   1. Exclude wages paid for with PPP funds or FFCRA credits
   2. Exclude employees whose wages do not qualify such as related individuals (question 59)
3. If your wages paid do not meet the $10,000 maximum, include allocable qualified health plan expenses.
4. Calculate the ERC for each qualifying employee → 50% of qualified wages in 2020 (up to $5,000) and 70% of qualifying wages in 2021 (up to $7,000)
5. Calculate the ERC amount for all employees.
6. Decide how to claim the credit and do so.
   1. Forms 941-X, 941, or 7200

Additional NFIB Resources on the ERC

• [Webinar] Resources and Relief for Your Small Business: Enhanced EIDL and ERTC Updates – October 20, 2021
  NFIB’s COVID-19 experts Beth Milito and Holly Wade have teamed up with SBA leadership for a webinar that covers recent updates to the ERC and more.
• [Webinar] Employee Retention Credit: A CPA Answers Frequently Asked Questions –
  • September 22, 2021
  • Join NFIB’s COVID-19 experts Beth Milito and Holly Wade, and special guest Kristi Stone, CPA, for an informative webinar that will provide answers to the most frequently asked questions about the ERC.
• [Webinar] Employee Retention Credit (ERC) – Small Business Updates from Treasury – August 25, 2021
  Join officials from the U.S. Department of the Treasury, along with NFIB experts Beth Milito and Holly Wade, for a webinar to learn how the credit works, eligibility requirements for 2020 and 2021, how businesses can claim the credit, the amount of the credit, and the timeline for receiving the credit.
• IRS Issues New ERC (Employee Retention Credit) Guidance: Clarifies Owner/Spouse Restrictions – August 9, 2021
• [Webinar] Employee Retention Credit (ERC) Small Business Workshop – July 28, 2021
  Join NFIB’s special guest, Matt Evans, CPA, SMA, CFM, as he explains how to determine ERC eligibility, calculate the amount of ERC, access and apply for the ERC, and utilize both the PPP and ERC programs.
• [Webinar] Step by Step Instructions on How to Claim the ERTC (or ERC) Retroactively – June 9, 2021
• [Webinar] PPP and ERC: A Tax Lawyer Explains How to Maximize Both Programs Together – May 26, 2021
  • In this NFIB webinar, tax attorney Martin Karamon joins Beth and Holly to discuss maximization of the ERC with the PPP. Additional topics included an overview of the ERC and eligibility, what to include in “gross receipts,” claiming the credit via Forms 7200 or 941, and an ERC Q&A.
• NFIB Webinar Provides Updates on COVID-19 Small Business Relief – May 21, 2021

• [Webinar] Overview and Updates on Federal Small Business COVID-19 Relief – PPP, ERC, EIDL, FFCRA, RRF, and more! – May 12, 2021
  • In this webinar, Beth and Holly review the federal relief options available for small businesses. For the ERC, they discussed eligibility criteria and credit calculation, in addition to how one claims the ERC.
• [Webinar] Employee Retention Tax Credit Essential with Jamie Trull – April 14, 2021
  • In this NFIB webinar, CPA and Balance CFO Jamie Trull joined Beth and Holly to give a deep dive on the ERC. Jamie covered everything a small business needs to know on the Credit, including what are qualifying wages, eligibility criteria and flowcharts, examples of ERC calculations for 2020 and 2021 qualifying businesses, and the interplay between the ERC and PPP.
• [Webinar] Employee Retention Tax Credit (ERTC): Step by Step Instructions with a CPA – February 24, 2021
  • In this NFIB webinar, CPA and Score Mentor Matt Evans joined Beth and Holly to discuss applying for the ERC. Webinar topics included an overview of the ERC, a step-by-step process for determining eligibility and applying using forms 941, 941x, and 7200.
• Tip Sheet: New Employee Retention Tax Credit for Small Business Available for 2020 and 2021 – March 22, 2021

Updated November 17, 2021