2023 ERTC - Employee Retention Tax Credit Update: Do Employers Still Have Time To Apply

In this 2023 ERTC updated report we dive deep into the mechanics of The Employee Retention Credit processes, chronology, dates, and eligibility requirements. Yes, It is still time to apply in 2023, but the waiting time for actually getting your money from the IRS will become longer and longer as there are still a lot of businesses that will most probably be applying in the coming months. So, get familiar with the ERTC essential information, check if you are eligible and then choose your CPA wisely and start the process.

Let's dig in...

The Employee Retention Credit was a refundable tax credit small businesses could claim during the COVID-19 pandemic. It provided some relief for struggling businesses who kept employees on their payrolls even when government pandemic restrictions required them to suspend operations or affected their gross receipts.

However, the Infrastructure Investment and Jobs Act (IIJA), signed by President Biden on Nov. 15, 2021, retroactively eliminated most employers' ability to claim an Employee Retention Credit (ERC) for wages paid after Sept. 30, 2021. The credit is no longer available, but you still have time to file for the periods it covered if you have yet to do so.

Employers could (and can still retroactively) claim credits for qualified wages $7,000 per employee per quarter for the first three quarters of 2021.

KEY 2023 ERTC INFORMATION TO REMEMBER

• The original ERC gave employers a maximum credit of up to $10,000 per employee retained from March 13, 2020, to Dec. 31, 2020. 
• Employers qualified if they were ordered to fully or partially shut down or if their gross receipts fell below 50% for the same quarter in 2019 (for 2020) and below 80% (for 2021).
• Those not in business in 2019 could use the corresponding quarters from 2020.
• The updated ERC, retroactive to March 27, 2020, also allowed employers who received Paycheck Protection Program (PPP) loans to claim the ERC for qualified wages not treated as payroll costs in obtaining forgiveness of the PPP loan.
• The Consolidated Appropriations Act, 2021 (CAA) extended the ERC to include wages paid before July 1, 2021 and expanded the maximum ERC to $7,000 per employee per quarter.
• The American Rescue Plan Act of 2021 (ARPA) extended coverage to include wages paid between July 1, 2021, and Dec. 31, 2021.
• Passage of the Infrastructure Investment and Jobs Act (IIJA) retroactively eliminated the ERC for most businesses after Sept. 30, 2021.

Understanding the Employee Retention Credit (ERC)

The Employee Retention Credit (ERC) was a refundable payroll tax credit originally for “qualified wages” paid to retained employees from March 13, 2020, to Dec. 31, 2020. It was created by the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act.[1][2]

The purpose of the ERC was to encourage employers to keep employees on the payroll even if they were not working during the covered period due to the effects of the outbreak of coronavirus. The original ERC was modified several times. Ultimately, it was retroactively halted as of Sept. 30, 2021, except for startup recovery businesses defined by the Infrastructure Investment and Jobs Act (IIJA).[3]

Business owners can still claim the ERC for eligible employees for all of 2020 and part of 2021 on taxes filed in 2022. They can file a Form 941X (Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund) up to three years after filing or two years after paying, whichever is later. Errors or mistakes found can still be reported using this form as well. Claims can be filed with respect to unclaimed credits for 2020 until April 15, 2024, and for 2021 until April 15, 2025.[4]

A Brief Chronology of the Employee Retention Credit

The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 provided a refundable employment tax credit for eligible employers paying qualified wages and health plan expenses.

This tax credit was initially available from March 13, 2020, through Dec. 31, 2020, for any employer whose business operations were fully or partially suspended due to orders from a governmental authority and to other employers who experienced a significant decline in their gross receipts.

The maximum ERC for that period was up to $5,000 per employee. Subsequent legislation modified and extended provisions of the ERC.

• The Consolidated Appropriations Act, 2021 (CAA), effective Dec. 27, 2020, extended the ERC to include wages paid before July 1, 2021 and expanded the maximum ERC to $7,000 per employee per quarter.[5]
• The American Rescue Plan Act of 2021 (ARPA), effective April 1, 2021, extended the coverage period to include wages paid between July 1, 2021, and Dec. 31, 2021.[6]
• Most recently, the retroactive repeal of the ERC by the IIJA as of Sept. 30, 2021, affects employers that anticipated receipt of the ERC for Oct. 1 through Dec. 31, 2021. The sole exception is for "recovery startup businesses" as defined by ARPA and amended by IIJA. Those companies were eligible to receive the full ERC through Dec. 31, 2021.

FAST FACT

A Recovery Startup Business, as defined by U.S. Code 3134(c)(5), is one that:[7]

• Began operations on or after Feb. 15, 2020
• Maintains average annual gross receipts that do not exceed $1 million
• Employs one or more employees (other than 50% owners)

What Repeal of the ERC Means to Your Business

The ERC repeal date of Sept. 30, 2021, affected any business that expected to receive the credit during the fourth quarter of 2021. As a result, they may have reduced their tax deposits or accounted for the expected credits in their budgets for the quarter.

If they held back payroll taxes in anticipation of receiving the ERC in the fourth quarter, they needed to determine any underpaid tax amounts and prepare to resolve those issues.[3]

If You Received Advance Payments

According to IRS guidance, if you received advanced ERC payments for the fourth quarter of 2021 and did not qualify as a recovery startup business, you can avoid "failure to pay" penalties if you repay the advance payments by the due date of your applicable employment tax return.[3][8]

If You Reduced Employment Tax Deposits

If you reduced your tax deposits on or before Dec. 20, 2021, for wages paid during the fourth quarter of 2021 and are not a recovery startup business, you will not be subject to a "failure to deposit" penalty if all of the following apply:[3][8]

• You reduced deposits in anticipation of the Employee Retention Credit based on rules in Notice 2021-24
• You deposit the amount you initially retained on or before the relevant due date for wages paid on Dec. 31, 2021 (the deposit due date will vary based on your deposit schedule)
• You report the tax liability resulting from the termination of your Employee Retention Credit on the applicable employment tax return or schedule that includes the period from Oct. 1, 2021, through Dec. 31, 2021.

You can refer to the applicable employment tax return instructions or schedule for additional information on how to report the tax liability.

Warning:

If you are not a recovery startup business, failure to deposit penalties are not waived if you reduce deposits after Dec. 20, 2021.[3]

If You Were a Recovery Startup

Qualified recovery startup businesses can claim the ERC through December 2021 if they meet specific criteria. A recovery startup business is one which:

• Began operations on or after Feb. 15, 2020
• Maintained average annual gross receipts that do not exceed $1 million
• Employed one or more employees (other than 50% owners)
• Has an annual gross income of less than $1 million
• Is not already eligible for ERC due to a suspension of operations or decline in gross receipts

To claim an ERC for Q4 2021, recovery startup businesses had to comply with all the rules in Notice 2021-20, Notice 2021-23, and Notice 2021-49 addressing CARES Act provisions that are the same as those provided under Section 3134 of the Code.

How Employers Qualify for the Credit

Whether you qualified as an eligible employer depends on the period. Here are the dates and the eligibility requirements.

March 13, 2020, Through Dec. 31, 2020

For the period from March 13, 2020, through Dec. 31, 2020, you must have carried on a trade or business, or you must have been a tax-exempt organization that:[1]

• Was partially or fully suspended due to COVID-19 orders from an appropriate governmental authority
• Experienced a significant COVID-19-related decline in gross receipts, defined as less than 50% of gross receipts for the same calendar quarter in 2019

Government and state entities and political subdivisions were not eligible for the 2020 ERC.

If you were self-employed, you were not eligible for the 2020 ERC for your wages. But if you employed other people, you may have qualified for the ERC wages paid to those employees.

Click HERE to Find Out If You Qualify, and How Much You Can Get

Jan. 1, 2021, Through Sept. 30, 2021

For the period from Jan. 1, 2021, through Sept. 30, 2021, you must have carried on a trade or business or were a tax-exempt organization that:[9]

• Was partially or fully suspended due to COVID-19 orders from an appropriate governmental authority
• Experienced a significant COVID-19-related decline in gross receipts, defined as less than 80% of gross receipts for the same calendar quarter in 2019

For this period, If you were not in business in 2019, you could use 2020 as your comparison year.

Government and state entities and political subdivisions were not eligible for the 2021 ERC. However, tax-exempt public colleges, universities, and hospitals were eligible.

Self-employed people were not eligible for the 2021 ERC for their wages. But if they employed other people, they could qualify for ERC wages paid to those employees.

The “significant decline in gross receipts” test for both 2020 and 2021 applies to whether your business was affected by COVID-19 or not.

Oct. 1, 2021, Through Dec. 31, 2021

Most employers did not qualify for the ERC from Oct. 1, 2021, through Dec. 31, 2021.

The Infrastructure Investment and Jobs Act amended Section 3134 of the Internal Revenue Code. The amendment limited the availability of the employee retention credit in the fourth quarter of 2021 to recovery startup businesses, as defined in section 3134(c)(5).

Business owners who were not recovery startup businesses were not eligible for the employee retention credit for wages paid after Sept. 30, 2021.

What Wages Qualify for the Credit?

The number of full-time employees you averaged in 2019 determined which employees you could claim for the credit, depending on the year.

For 2020, if you averaged more than 100 full-time employees, only wages for those you retained who were not working could be claimed. However, if you had 100 or fewer workers, you could claim the wages of all employees whether or not they were working.[10]

For 2021, the threshold was raised to 500 full-time employees, meaning that if you employed more than 500 people, you could only claim the ERC for those not providing services. If you had 500 or fewer employees, you could claim the ERC for all of them, working or not.[9]

CARES Act and the Credit

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

• Wages for which you received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act (Phase II)
• Any wages you counted as part of the credit for paid family and medical leave under section 45S of the Internal Revenue Code
• Wages paid to certain relatives
• Any employee for whom you were granted a Work Opportunity Tax Credit under Section 51 of the Internal Revenue Code

Under the CAA of 2021, the prohibition was also extended to wages affected by certain other credits, including the Research Activities Credit, Indian Employment Credit, Credit for Employer Differential Wage, and Empowerment Zone Employment Credit.[1]

Important: The Employee Retention Credit applied to workers employed on a full-time or part-time basis if their employers met the requirements.[2]

Amount of the Credit for 2020

For 2020, the credit was equal to 50% of up to $10,000 in qualified wages per employee (including amounts paid toward health insurance) for all eligible calendar quarters beginning March 13, 2020, and ending Dec. 31, 2020, up to $10,000 per eligible employee annually.

A qualifying period began in any quarter where receipts were less than 50% of receipts in the same quarter in 2019. It ended at the beginning of the first calendar quarter after the first quarter in which gross receipts were greater than 80% of gross receipts for that quarter in 2019.

The credit was applied to your portion of the employee’s Social Security taxes and was fully refundable. This means that the credit served as an overpayment and would be refunded to you after subtracting your share of those taxes.[10]

Amount of the Credit for 2021

For 2021, the credit was equal to 70% of up to $10,000 in qualified wages per employee (including amounts paid toward health insurance) for each eligible calendar quarter beginning Jan. 1, 2021, and ending Sep. 30, 2021. This works out to a maximum credit of $21,000 per employee ($7,000 per quarter).

The credit was applied to your portion of the employee’s Social Security taxes and was fully refundable. This means that the credit would serve as an overpayment and be refunded to you after subtracting your share of those taxes.[9]

How to Get the ERC for Unforgiven PPP Loan Proceeds

If you received a PPP loan during the pandemic and have portions that are unforgiven, you're still able to claim the credits retroactively, but:11

• The ERC cannot be claimed on PPP wages used for PPP loan forgiveness
• Some adjustments may be required
• Your gross income must have fallen 50% in 2020 and 20% in 2021 from the same quarter in 2019
• You must file Form 941X within three years of filing or two years of paying the taxes

Who Qualifies for the Employee Retention Credit (ERC)?

Businesses required to suspend some or all operations due to COVID-19 government restrictions or companies that lost 50% of their gross receipts from the same quarter of the previous year qualified for the ERC.

How Does Employee Retention Credit Work?

The ERC was a tax credit in which business owners were given a refundable tax credit for keeping employees on their payrolls during the COVID-19 pandemic.

How Much Is the Employee Retention Credit Per Employee?

For March through December 2020, the ERC was $10,000 per employee for the year. From January to September 2021, the ERC was $7,000 per employee per quarter. From September to December 2021, the ERC remained the same for recovery startups; the ERC has since been discontinued.

The Bottom Line

The Employee Retention Credit was a refundable tax credit intended to allow small business owners to keep paying their employees during the COVID-19 pandemic. The credit was discontinued at the end of 2021.

Employers can still file for the credit for the period of March 2020 to September 2021. Recovery startup businesses can file for the period March 2020 through December 2021.

Correction—Sept. 20, 2022: A previous version of this article did not mention the $10,000 annual cap to the ERC from March 12, 2020, to Dec. 31, 2020.

Click HERE to Find Out If You Qualify, and How Much You Can Get

ARTICLE SOURCES

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. They also reference original research from other reputable publishers where appropriate. You can learn more about the standards they follow in producing accurate, unbiased content in their editorial policy.

1. Internal Revenue Service. “Notice 2021-20 Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act.”
2. U.S. Congress. “H.R.748,” Page 134.
3. Internal Revenue Service. "IRS issues guidance regarding the retroactive termination of the Employee Retention Credit."
4. Internal Revenue Service. "Instructions for Form 941-X," Page 6.
5. U.S. Congress. "The Consolidated Appropriations Act, 2021 (CAA)."
6. U.S. Congress. "H.R.1319 - American Rescue Plan Act of 2021."
7. U.S. Code. "26 USC 3134: Employee retention credit for employers subject to closure due to COVID-19."
8. Internal Revenue Service. "Employment Tax Forms."
9. Internal Revenue Service.New Law Extends COVID Tax Credit for Employers Who Keep Workers on Payroll.”
10. Internal Revenue Service. “Employee Retention Credit.”
11. Internal Revenue Service. "Employers May Be Able to Claim the Employee Retention Credit and Have a PPP Loan."

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