The federal government introduced the Employee Retention Credit (ERC) as a significant initiative to support businesses during economic challenges. This refundable employment tax credit was designed to alleviate the financial burden on employers who continued to pay their employees amidst operational disruptions. For businesses that qualify and didn’t initially claim the credit, there’s still an opportunity to access these benefits by filing adjusted employment tax returns. Specifically, employers who file quarterly employment tax returns can utilize Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund PDF to retroactively claim the ERC for eligible quarters in 2020 and 2021.
Generally, eligibility for the ERC concluded for most businesses for wages paid after September 30, 2021, with a notable exception for recovery startup businesses. Recovery startups could still claim the ERC for wages paid after June 30, 2021, and before January 1, 2022. Eligible employers retain the right to claim the ERC for previous quarters by submitting an adjusted employment tax return within the stipulated deadlines, as detailed in the instructions for the relevant forms, such as Form 941-X.
It’s crucial to remember that if you’re claiming the Employee Retention Credit using Form 941-X, the wage deduction must be reduced by the credit amount. This adjustment may necessitate amending your income tax return forms, such as Forms 1040, 1065, or 1120, to accurately reflect the reduced deduction. Further details can be found in resources concerning Correcting Employment Taxes.
The ERC has undergone several amendments since its inception under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in March 2020. These changes were introduced through the Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act), the American Rescue Plan (ARPA) Act of 2021, and the Infrastructure Investment and Jobs Act (IIJA). To effectively navigate these changes, understanding the evolution of the ERC is essential.
To provide a clear and concise overview of these amendments, a Comparative Chart is invaluable. This chart breaks down the key aspects of the ERC as modified by each legislative act, allowing businesses to quickly identify the relevant rules and periods. Below is a comparative chart outlining the key changes to the Employee Retention Credit across different legislative periods:
| CARES Act of March 2020 | Relief Act of 2021 | American Rescue Plan Act of 2021 | Infrastructure Investment and Jobs Act (IIJA) | |
|---|---|---|---|---|
| Period for qualified wages paid | March 13 – December 31, 2020 | Extended: January 1 – June 30, 2021 | Extended: July 1, 2021 – December 31, 2021* *IIJA retroactively amends section 3134 to limit availability in the fourth quarter of 2021 to a recovery startup business. | October 1 – December 31, 2021 for wages paid only by a recovery start up business, as defined in section 3134(c)(5) of the Code. |
| Eligible employer | Any employer operating a trade, business, or a tax-exempt organization, but not governments, their agencies, and instrumentalities. | For calendar quarters in 2021, expanded to include certain governmental employers that are: – Organizations described in section 501(c)(1) and exempt from tax under section 501(a), and – Colleges or universities or whose principal purposes is to provide medical or hospital care | No changes | No change |
| Employment tax offset | Employer’s portion of Social Security tax | No change | Changed to employer’s portion of Medicare tax | No change |
| Eligibility requirements | Employer must experience: – full or partial suspension of operations due to government order due to COVID-19 during any quarter, or – significant decline in gross receipts (beginning when gross receipts are less than 50% of gross receipts for the same calendar quarter in 2019 and ending in the first calendar quarter after the calendar quarter in which gross receipts are greater than 80 percent of gross receipts for the same calendar quarter in 2019) | For calendar quarters in 2021, amended decline in gross receipts to be defined as quarter where gross receipts are less than 80% of the same quarter in 2019. For calendar quarters in 2021, added an alternative quarter election rule giving employers ability to look at prior calendar quarter and compare to the same calendar quarter in 2019 to determine whether there was a decline in gross receipts. Provided a rule for employers not existence in 2019 to allow employers that were not in existence in 2019 to determine whether there was a decline in gross receipts by comparing the calendar quarter in 2021 to its gross receipts to the same calendar quarter in 2020. | For third and fourth calendar quarters of 2021, amended to make the credit available to “recovery startup businesses,” employers who otherwise do not meet eligibility criteria (full or partial suspension or decline in gross receipts) “Recovery startup businesses” are employers: – That began carrying on any trade or business after February 15, 2020, – That had average annual gross receipts under $1,000,000 for the 3-taxable-year period ending with the taxable year that precedes the calendar quarter for which the credit is determined, and – Do not meet the other eligibility criteria | Limited availability for the fourth quarter of 2021 to a recovery startup business as defined in section 3134(c)(5) of the Code. Removed requirement for fourth calendar quarter that a recovery startup business not otherwise be an eligible employer due to a full or partial suspension of operations or a decline in gross receipts. |
| Percent of qualified wages eligible for credit | – 50% of qualified wages ($10,000 per employee for the year including certain health care expenses) – 100 or fewer average full-time employees in 2019, wages paid to employees providing services and not providing services are qualified wages – Greater than 100 average full-time employees in 2019, wages paid to employees not providing services are qualified wages | – For calendar quarters in 2021, increased maximum to 70% ($10,000 per employee per calendar quarter including certain health care expenses) for qualified wages paid between January 1 and June 30, 2021 – For calendar quarters in 2021, 500 or fewer average full-time employees in 2019, wages paid to employees providing services and not providing services are qualified wages – For calendar quarters in 2021, greater than 500 average full-time employees in 2019, wages paid to employees not providing services are qualified wages | – Maximums unchanged – For third and fourth calendar quarters of 2021, “severely financially distressed employers” may treat all wages as qualified wages during the calendar quarter in which the employer is severely financially distressed – “Severely financially distressed employers” are eligible employers due to a decline in gross receipts, but with gross receipts that are less than 10% of the gross receipts in a calendar quarter as compared to the same calendar quarter in 2019. – No change for small employers qualified wages – Provides that employers that were not in existence in 2019 may use the average number of full-time employees in 2020 to determine whether the employer had greater than 500 average full-time employees | – Maximums unchanged – Due to unavailability of “decline gross receipts,” rules relating to “severely financially distressed employers” no longer apply in the fourth calendar quarter of 2021. |
| Credit maximums | Maximum credit of $5,000 per employee in 2020 | Increased the maximum per employee to $7,000 per employee per quarter in 2021 | – Maintained quarterly maximum defined in Relief Act ($7,000 per employee per calendar quarter) – “Recovery startup businesses” are limited to a $50,000 credit per calendar quarter | – No changes |
This comparative chart illustrates the modifications to the ERC across different legislative acts. For instance, the period for qualified wages, eligibility criteria, and credit amounts have all evolved. Notably, the Relief Act of 2021 extended the credit period and broadened eligibility, while the American Rescue Plan Act of 2021 further extended the period into the latter half of 2021 and introduced provisions for “recovery startup businesses.” The Infrastructure Investment and Jobs Act (IIJA) then limited the availability of the ERC for the fourth quarter of 2021 specifically to recovery startup businesses.
By using this comparative chart, businesses can easily identify the specific rules applicable to their situation based on the period in which wages were paid and their employer status. Understanding these nuances is crucial for accurately claiming the Employee Retention Credit and ensuring compliance with IRS guidelines. For detailed guidance and to determine your eligibility and claim process, always refer to the official IRS resources and forms, such as Form 941-X and related instructions.
