Employee Retention Credit (ERC) = refundable tax credit against payroll taxes for businesses that retained employees during COVID-19.

Created by CARES Act (March 2020), expanded by Consolidated Appropriations Act (December 2020), and extended by American Rescue Plan (March 2021). **Program ended September 30, 2021**, but businesses can still claim retroactive credits by filing amended payroll tax returns (Form 941-X) until statute of limitations expires (April 15, 2024 for 2020 credits, April 15, 2025 for 2021 credits). **Maximum credit amounts**: 2020: Up to **$5,000 per employee** for entire year (50% of up to $10,000 qualified wages). 2021 Q1-Q3: Up to **$7,000 per employee per quarter** (70% of up to $10,000 qualified wages per quarter) = **$21,000 max** for Q1+Q2+Q3. **Total potential**: $5,000 (2020) + $21,000 (2021) = **$26,000 per employee** across all eligible quarters. **2025 eligibility requirements** (for retroactive claims): (1) **Business operation during 2020-2021**: Must have been operating business with W-2 employees during eligible quarters.

Sole proprietors, partners, >2% S-Corp shareholders, >50% owners do NOT qualify for their own wages (but their employees do). (2) **Experienced one of two qualifying events**: **Event A - Significant revenue decline**: 2020: Gross receipts declined >50% in any 2020 quarter vs same 2019 quarter.

Qualify for that quarter + following quarter (even if revenue recovered).

Example: Q2 2020 revenue $100K vs Q2 2019 $220K = 54.5% decline → Qualify Q2 and Q3 2020. 2021: Gross receipts declined >20% in any 2021 quarter vs same 2019 quarter.

Example: Q1 2021 revenue $160K vs Q1 2019 $220K = 27.3% decline → Qualify Q1 2021. **Event B - Full or partial suspension**: Government order fully or partially suspended business operations due to COVID-19.

Examples: Restaurant forced to close dining room (only takeout allowed), Gym closed by state mandate, Hair salon reduced capacity from 100% to 25%, Event venue prohibited from hosting gatherings >10 people.

Must be government ORDER (federal, state, local), not just recommendations or voluntary closures.

Nominal effect exception: If suspension affected <10% of operations (measured by gross receipts or hours), may not qualify. (3) **Recovery Startup Business (2021 Q3-Q4 only)**: Businesses starting after Feb 15, 2020 that earned <$1M annually can claim up to $50,000 total ERC for Q3 and Q4 2021 (even without revenue decline or suspension).

Capped at $50K total, not per employee. (4) **Not received PPP loan forgiveness for same wages**: Cannot "double dip" - same wages used for PPP forgiveness cannot also claim ERC.

But can use different wages for each program if you had enough payroll.

Example: $100K total Q2 2020 payroll, $60K used for PPP forgiveness → Can claim ERC on remaining $40K. **Qualified wages definition** (what counts): 2020 (employers with >100 FTE in 2019): Only wages paid to employees NOT providing services due to suspension or revenue decline qualify.

Example: Restaurant closed, pays idle kitchen staff $30K → Qualified.

Pays delivery drivers $20K still working → Not qualified. 2020 (employers with ≤100 FTE in 2019): ALL wages paid during qualifying quarter count, whether working or not. 2021 (employers with >500 FTE in 2019): Only wages to non-working employees qualify. 2021 (employers with ≤500 FTE in 2019): ALL wages qualify. **Qualified wages include**: W-2 wages, salaries, hourly pay, Employer-paid health insurance (allocable to wages), Sick leave, family leave (subject to caps), Tips (employer portion only). **Do NOT include**: Owner wages (sole proprietor, partner, >2% S-Corp shareholder, >50% family member), 1099 contractor payments, Wages above $10K per employee per quarter (excess not qualified). **2025 filing deadline urgency**: 2020 ERC: **Deadline passed April 15, 2024** (3 years from April 15, 2021 original due date).

If you filed 2020 Form 941 late, deadline is 3 years from actual filing date (check your records). 2021 Q1-Q2 ERC: Deadline **April 15, 2025** (must file 941-X by this date). 2021 Q3 ERC: Deadline **April 15, 2025** (same). 2021 Q4 ERC: Deadline **April 15, 2026** (one year left after 2025). **IRS processing delays (2024-2025 reality)**: IRS placed ERC moratorium September 2023 due to fraud concerns.

Processing backlog 1-2 years for legitimate claims filed before moratorium.

New claims filed 2024-2025 may take 12-18 months to process.

ERC mills (fraudulent promoters) caused 60%+ claims to be improper per IRS estimates - expect heavy scrutiny. **Warning signs your claim may be denied**: Claimed ERC but had revenue INCREASE during COVID (no decline qualifier).

Claimed for owners/family members (not eligible).

Used same wages for PPP forgiveness (double dipping).

Claimed without government suspension order documentation (just "felt" suspended).

Claimed based on supply chain disruptions without government order (not qualifying).

Used ERC mill that charged 15-25% contingency fee (red flag - legitimate preparers charge fixed fee). **If eligible, still worth claiming in 2025**: Average legitimate claim: $50,000-$150,000 for small business (5-15 employees).

Large refund: $500,000+ for businesses with 50+ employees across all eligible quarters.

Refundable credit = check from IRS, not just offset against taxes owed. **Next steps if claiming**: Gather documentation: Quarterly payroll reports (Form 941), W-2s, Government shutdown orders (if using suspension test), Gross receipts records (P&L statements comparing 2019 vs 2020/2021).

Calculate quarters you qualify (revenue decline test OR suspension test).

Calculate qualified wages per employee per quarter (≤$10K per employee per quarter).

File Form 941-X for each qualifying quarter (separate form per quarter).

Expect 12-18 month wait for refund (IRS backlog).

Consider professional help (CPA, enrolled agent) - complex calculations and high audit risk.

Step-by-step ERC calculation with examples covering 2020 and 2021 rules (different credit rates and wage limits). **Step 1: Determine which quarters you qualify** - Revenue decline test: Compare each quarter's gross receipts to same quarter in 2019. 2020: Decline >50% = qualify that quarter + next quarter. 2021: Decline >20% = qualify that quarter only.

Example: Small restaurant, 2019 quarterly revenue steady $200K. 2020 Q2 revenue $80K (60% decline vs 2019 Q2 $200K) → **Qualify Q2 and Q3 2020**. 2021 Q1 revenue $140K (30% decline vs 2019 Q1 $200K) → **Qualify Q1 2021**. 2021 Q2 revenue $190K (5% decline) → **Do NOT qualify Q2 2021** (under 20% threshold). **Qualified quarters**: 2020 Q2, Q3 + 2021 Q1.

Suspension test (alternative): If government order suspended operations Q2-Q4 2020, automatically qualify those quarters (even if revenue increased). **Step 2: Identify your FTE count** (determines which wages qualify): Count full-time equivalent employees in 2019 (used as baseline).

FTE = (Total hours worked by all employees in 2019) ÷ (2,080 hours × 12 months).

Or simplified: Count employees who worked 30+ hours/week as 1 FTE, <30 hours as 0.5 FTE.

Example restaurant: 2019 had 8 full-time employees (30+ hrs/week) + 6 part-time (20 hrs/week) = 8 FTE + 3 FTE = **11 FTE total**. **Result**: 11 FTE ≤ 100 (for 2020) AND ≤ 500 (for 2021) → **All wages qualify** (easier calculation). **Step 3: Calculate qualified wages per quarter** - 2020 rules (≤100 FTE = all wages count): List all W-2 wages + employer health insurance costs per employee for Q2 and Q3 2020.

Cap at $10,000 per employee per YEAR (not per quarter in 2020).

Example Q2 2020: Employee A wages $8,000 + health $1,500 = $9,500 qualified.

Employee B wages $12,000 + health $2,000 = $14,000 total → Cap at **$10,000 qualified**.

Employee C wages $6,500 + health $1,000 = $7,500 qualified. ...continue for all 14 employees.

Total Q2 qualified wages (all employees summed, each capped at $10K) = $110,000. 2020 annual cap warning: If Employee B had $10K qualified in Q2, cannot claim ANY additional for Q3 2020 (annual cap reached).

If Employee C had $7.5K in Q2, can claim up to $2.5K more in Q3 2020 ($10K - $7.5K remaining).

Total Q3 qualified wages (applying remaining annual cap per employee) = $35,000. **2020 total qualified wages** = $110,000 (Q2) + $35,000 (Q3) = **$145,000**. 2021 rules (≤500 FTE = all wages count): Quarterly cap of $10,000 per employee (not annual).

Example Q1 2021: Employee A wages $9,000 + health $1,800 = $10,800 → Cap at **$10,000 qualified**.

Employee D (new hire) wages $5,000 + health $800 = $5,800 qualified. ...continue for all employees in Q1.

Total Q1 qualified wages (all employees summed, each capped at $10K for the quarter) = $125,000. **Step 4: Apply credit percentage** - 2020 credit rate = 50% of qualified wages. 2020 Q2 credit = $110,000 × 50% = **$55,000**. 2020 Q3 credit = $35,000 × 50% = **$17,500**. **2020 total credit** = $55,000 + $17,500 = **$72,500**. 2021 credit rate = 70% of qualified wages. 2021 Q1 credit = $125,000 × 70% = **$87,500**. **Grand total ERC** = $72,500 (2020) + $87,500 (2021 Q1) = **$160,000 refundable credit**. **Step 5: Adjust for PPP loan forgiveness (critical)** - If you received PPP loan forgiveness, cannot use same wages for ERC.

Example complication: PPP loan $100,000 forgiven in 2020, used for 8 weeks of payroll April-May 2020 (Q2).

That $100,000 of wages cannot also claim ERC.

If Q2 2020 total payroll was $180,000, and $100,000 used for PPP → Only $80,000 available for ERC.

Recalculated Q2 2020 ERC = $80,000 × 50% = **$40,000** (vs $55,000 if no PPP).

Some businesses had enough payroll to "segregate" wages: Use wages for PPP forgiveness (typically highly-paid employees), use different wages for ERC (typically lower-paid or part-time). **Step 6: Account for other credits (reduces ERC)** - Work Opportunity Tax Credit (WOTC) claimed for same employee wages → Must subtract WOTC wages from ERC qualified wages.

Example: Claimed $5,000 WOTC for Employee E in Q1 2021 → Employee E's $10,000 Q1 wages become $5,000 qualified for ERC.

Employer Social Security tax credits (e.g., FFCRA sick leave credits) also reduce ERC qualified wages. **Step 7: File Form 941-X for each quarter** - Separate 941-X required for each qualifying quarter (cannot combine). 2020 Q2: File 941-X for Q2 2020, claim $40,000 (after PPP adjustment). 2020 Q3: File 941-X for Q3 2020, claim $17,500. 2021 Q1: File 941-X for Q1 2021, claim $87,500.

Each 941-X must show: Line 18c = Total qualified wages, Line 26 = ERC amount (wages × 50% or 70%), Supporting schedules with employee-by-employee breakdown. **Total refund requested** = $40,000 + $17,500 + $87,500 = **$145,000** (after all adjustments). **Complex scenario example** (>100 FTE in 2020, >500 FTE in 2021): Mid-size manufacturer, 2019 had 150 FTE. 2020 rules: Only wages to NON-WORKING employees qualify (>100 FTE threshold).

Example: Q2 2020 laid off 30 employees, paid them $180,000 while idle → **$180,000 qualified** (capped at $10K per employee annual = $300K max for 30 employees, so $180K is under limit).

Still-working 120 employees paid $1.2M → **$0 qualified** (were providing services).

Q2 2020 ERC = $180,000 × 50% = **$90,000**. 2021 rules: Grew to 520 FTE by 2021 (>500 threshold).

Q1 2021, temporary shutdown affected 40 employees, paid $250,000 while not working → $250,000 qualified (capped at $10K per employee per quarter = $400K max, so $250K under). 480 working employees paid $3.5M → **$0 qualified**.

Q1 2021 ERC = $250,000 × 70% = **$175,000**. **Verification steps** (ensure accurate calculation): Sum of all employee qualified wages should not exceed: 2020: $10,000 × number of employees (annual cap). 2021: $10,000 × number of employees × number of qualifying quarters (quarterly cap).

Credit rate applied correctly: 50% for all 2020 quarters, 70% for all 2021 quarters.

PPP wages excluded: No overlap between wages used for PPP forgiveness and ERC.

FTE threshold correctly applied: Used 2019 FTE count, determined which wages qualify based on working vs non-working status. **Documentation to retain** (IRS audit defense): Payroll journals showing gross wages per employee per quarter.

Health insurance invoices allocated to employees.

Form 941 originally filed (shows employer SS tax paid - basis for refund).

Government shutdown orders (if using suspension test).

P&L statements proving revenue decline (if using gross receipts test).

PPP forgiveness application (shows which wages used for PPP).

Employee time records (if >100 or >500 FTE, proves who was working vs not). **Common calculation errors to avoid**: Using gross receipts from wrong comparison period (must compare to same quarter 2019, not prior quarter or 2020 comparison).

Exceeding $10K per employee cap (easy to miss in 2020 annual limit).

Claiming owner wages (sole proprietors, >2% S-Corp shareholders, >50% owners ineligible).

Not adjusting for PPP (double-dipping will trigger audit and repayment demand).

Including 1099 contractors (only W-2 employees count).

Claiming tips without employer portion (employee-reported tips don't qualify, only employer-paid portion subject to payroll tax).

Forgetting health insurance (often 10-20% of qualified wages, easy $15K-$30K in extra credits). **When to hire professional help**: Total potential credit >$50,000 (worth CPA fee $3K-$8K for accuracy).

Had PPP loan (complex wage segregation calculations).

FTE count near 100 (2020) or 500 (2021) threshold (determines which wages qualify - errors costly).

Multiple entities or related party rules (controlled group aggregation required).

IRS already contacted you about ERC (audit defense requires pro).

ERC mill previously filed for you (may need to withdraw fraudulent claim and refile correctly).