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Employee Retention Credit: An Overview

Updated on May 17, 2023 - 10:30 AM by Admin, TaxBandits

The Employee Retention Credit (ERC) is a tax credit designed to encourage eligible employers to keep employees on their payroll during the COVID-19 pandemic. Eligible employees receive 50% - 70% of qualifying wages paid from March 13, 2020 to December 31, 2021.

The following topics are covered in this article:

  1. What is the Employee Retention Credit (ERC)?
  2. How do businesses claim the Employee Retention Credit?
  3. What are the eligibility requirements for businesses to claim the ERC?
  4. Is there a deadline for claiming the ERC Tax Credit?
  5. IRS Warnings about Fraudulent ERC Claims
  6. How do I file Form 941 with TaxBandits?

1. What is the Employee Retention Credit (ERC)?

The Employee Retention Credit is a refundable credit that was designed in response to the COVID-19 pandemic. This credit was introduced as part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in 2020. Its purpose was to encourage employers to keep employees on the payroll during the pandemic.

Under the ERC, the eligible businesses that experienced a massive decline in their gross recipients from March 31, 2020, to December 31, 2021, or closed due to the government order as part of the pandemic measures can claim the refundable credits for certain employment taxes when they file an original or adjusted employment tax return.

2. How do businesses claim the Employee Retention Credit?

Businesses that are eligible for the ERC Tax Credit can claim it on either an original or amended employment tax return. For most businesses, this will be the payroll Form 941 or the amendment Form 941-X. Businesses can claim the ERC tax credit for qualified wages paid between March 13, 2020, and Dec. 31, 2021. Small businesses that has annual tax liability of $1,000 or less can claim ERC using Form 944.

3. What are the eligibility requirements for businesses to claim the ERC?

Businesses must meet the following eligibility requirements to claim the ERC Tax Credit.

Eligible Employer ERC Legislature Period of Qualified wages Eligibility Criteria Eligible Wages that Qualify for the Credit
Eligible Employers for Q2, Q3 and Q4 of 2020 CARES Act of March 2020 March 13 - Dec 31, 2020
  • The employer's business was fully or partially suspended due to government orders related to COVID-19.
  • Gross receipts declined 50% in a quarter compared to the same quarter in 2019.
  • The qualified wages should not exceed $10,000 per employee for the year.
 Employers can claim 50% of qualified wages paid up to $5,000 per employee for the year.
Eligible Employers for Q1 and Q2 of 2021 Relief Act of 2020 January 1 - June 30, 2021
  • The employer's business was fully or partially suspended due to government orders related to COVID-19.
  • Gross receipts declined by 80% in a quarter compared to the same quarter in 2019.
  • The qualified wages should not exceed $10,000 per employee for all calendar quarters
 Employers can claim 70% of qualified wages, with a maximum of $7,000 per employee per quarter.
Eligible Employers for Q3 of 2021 American Rescue Plan Act of 2021 (ARPA) July 1 - December 31, 2021
  • The employer's business was fully or partially suspended due to government orders related to COVID-19.
  • The employer qualifies as a “Recovery Startup Business”.
  • Gross receipts declined by 80% in a quarter compared to the same quarter in 2019.
  • The qualified wages should not exceed $10,000 per employee for all calendar quarters.
  • Employers can claim 70% of qualified wages, with a maximum of $7,000 per employee per quarter.
  • Recovery Startup Businesses are limited to claiming $50,000 in credit per calendar quarter.
Eligible Employers for Q4 of 2021 Infrastructure Investment and Jobs Act (IIJA) October 1 - December 31, 2023 Only employers that are considered a Recovery Startup Business are eligible for the Employee Retention TaxCredit
  • Employers can claim 70% of qualified wages, with a maximum of $7,000 per employee per quarter
  • Recovery Startup Businesses are limited to claiming $50,000 in credit per calendar quarter.

*Recovery Startup Businesses

The IRS considers a business to be a Recovery Startup if:

  • The business was created and began operations after February 15, 2020.
  • The business had annual gross receipts of less than $1,000,000 for the 2020 or 2021 tax years.
  • The business meets other ERC criteria such as a full or partial suspension of operations or a decline in gross receipts.
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Note: For the 2022 tax year, the IRS removed the ability to claim the Employee Retention Tax Credit for all quarters on 941 Form.

4. Is there a deadline for claiming the ERC Tax Credit?

There are deadlines for claiming the ERC, according to the IRS, they are as follows:

  • For the 2020 tax year, the deadline for the ERC is April 15, 2024. This deadline applies to all 941 filings in the second, third, and fourth quarters of 2020.
  • For the 2021 tax year, the deadline is April 15, 2025. This deadline applies to all four quarters because the ERC was available for all four quarters of 2021.

5. IRS Warnings about Fraudulent ERC Claims

The IRS is warning taxpayers to be vigilant about possible scams related to the ERC, as there have been increasing numbers of fraudulent ERC claims reporting lately. This is mainly due to the emergence of third parties that offer to handle the ERC claim process for price. Heavily marketed ERC misinformation related to ERC is fooling many businesses. They pay high fees upfront for ERC filings that are either wrong or not eligible.

Therefore, the IRS urges taxpayers to be cautious and to carefully review any communications they receive related to the ERC, especially if they come from sources they are not familiar with.

The IRS will never contact you via phone or email about your refund status unless we have first mailed you a notice (such as CP14) telling you we've processed your return and are ready for further action on your part - like payment or submission of additional documents needed before we can process your return further.

IRS also reminds Taxpayers to claim ERC only if they meet all of the eligibility requirements, and they should be prepared to provide documentation to support their claim. Taxpayers who make fraudulent claims could face penalties, interest, and criminal prosecution.

If you suspect that someone is committing or has committed tax fraud, contact the IRS immediately. You can report suspected tax fraud online at www.irs.gov or call the IRS toll-free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses). If you are a victim of identity theft and believe your Social Security number has been stolen, visit www.identitytheft.gov for more information about what to do next.

6. How do I file Form 941 with TaxBandits?

The businesses that are qualified for Employee Retention Credits can claim ERC by filing Form 941 with TaxBandits. Follow the simple steps to e-file Form 941 using TaxBandits.

  • Step 1: Sign in to create a free TaxBandits account!
  • Step 2: Choose "Form 941" and enter the details.
  • Step 3: Use the built-in worksheets to calculate your tax credits and liabilities.
  • Step 4: Review and Transmit to the IRS.
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Note: you want to know the status of your ERC or refund after your return has been accepted, please contact the IRS at (800) 829-4933. Please keep in mind that TaxBandits support is unable to provide you with any information regarding your refund. Only the IRS can provide ERC or refund information.

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