Employee Retention Credit Guidance Issued for Q3 and Q4

The Employee Retention Credit is one provision of early COVID stimulus that has been extended and expanded as the pandemic has evolved. Recently, the IRS issued additional guidance to help financially distressed employers take advantage of this tax credit in Q3 and Q4.

Find out more about what’s new, who qualifies, and how to report.

What is the Employee Retention Credit?

The Employee Retention Credit (ERC) is a federal tax incentive designed to help organizations keep employees on the payroll despite COVID-related setbacks.

According to the IRS, the fully refundable employer tax credit applies to qualified wages—including health plan expenses—paid between March 12, 2020, and December 31, 2021. It is equal to 50% of qualified wages and limited to $5000 per employee for all calendar quarters.

The ERC was created by the CARES Act at the outset of the COVID pandemic in March 2020. A year later, the American Rescue Plan Act (ARPA) extended the credit, making it available through December 2021.

Who Can Claim the Employee Retention Credit?

Eligible employers include private businesses and tax-exempt organizations. Employers qualify for the ERC if:

1. a decline in gross receipts exceeded 50% (2020) or 20% (2021) compared to the same quarter in 2019.

2. a COVID-related government order resulted in fully or partially suspended operations.

Both small and large employers are eligible but under different qualifications:

Small businesses (500 or fewer full-time employees) can use all employee wages to qualify for the ERC—whether open for business or closed due to a government order

Large businesses (more than 500 full-time employees) can only use wages paid when they are not operating due to COVID.

It’s also important to note that, prior to December 2020, Paycheck Protection Program (PPP) loan recipients were excluded from claiming the ERC, but since then, ERC eligibility has been expanded to include those financially distressed employers. However, employers wishing to take advantage of PPP loan forgiveness and the tax credit cannot use the same wages to qualify.

What’s the Latest Guidance for the Employee Retention Credit?

The IRS’s latest guidance applies to eligible employers for qualified wages paid after June 30, 2021, and before January 1, 2022. For the most part, the notice amplifies earlier guidance from the first half of the year. Notable provisions include:

a clarification that—similar to PPP loan forgiveness calculations—the same wages cannot count as qualified ERC wages and as payroll costs under the Restaurant Revitalization Fund and the Shuttered Venue Operators Grant.
a clarification of the test for distinguishing between small and large employers, which should be based on the number of full-time employees rather than full-time “equivalent,” which can include part-time workers’ hours.
an expanded definition of “qualified wages” to include tips that are subject to FICA.
an expanded definition of “eligible employer” to include businesses created after February 15, 2020, with annual gross receipts that do not exceed $1,000,000 on average. (These so-called “recovery startup” businesses are subject to a $50,000 quarterly ERC limit.)
an extension of the statute of limitations from 3 to 5 years.
a requirement that eligible employers claim the ERC against their share of Medicare tax (as opposed to Social Security Tax).

For more comprehensive information about this additional guidance, see IRS Notice 2021-49 and IRS Revenue Procedure 2021-33.

How to Claim the Employee Retention Credit

Eligible employers may claim this refundable federal tax credit by reporting qualified wages paid and related health insurance costs on their quarterly return, Form 941. The ERC can also be claimed retroactively, using Form 941-X.

If a reduction in tax deposits does not cover the credit, employers may be eligible for an advance payment by submitting Form 7200.

For more information about COVID-related employer tax credits: