How to File for the Employee Retention Tax Credit

The Employee Retention Credit (ERC) is a refundable tax credit for eligible businesses that retained employees during the COVID-19 pandemic. Established under the CARES Act in 2020 and later expanded, it aimed to offset payroll taxes. The ERC is a payroll tax credit, distinct from other pandemic relief.

Businesses impacted by the pandemic, through significant revenue declines or government-mandated shutdowns, could qualify. While the program concluded for most employers on September 30, 2021, eligible businesses can still retroactively claim the credit by amending prior payroll tax returns.

Understanding Eligibility Requirements

Businesses qualify for the Employee Retention Credit (ERC) through two paths: a significant decline in gross receipts or a full or partial suspension of operations due to a government order. For 2020, a significant decline meant gross receipts were less than 50% of the same quarter in 2019. For 2021, the threshold was less than 80% of the same quarter in 2019, or the immediately preceding quarter.

The second path is a full or partial suspension of operations due to government orders related to COVID-19 that limited commerce, travel, or group meetings. These orders could be federal, state, or local, such as mandatory closures or capacity restrictions. Recommendations or guidelines do not qualify as government orders for ERC purposes.

Businesses that received Paycheck Protection Program (PPP) loans can also claim the ERC, provided the same wages are not used for both PPP loan forgiveness and the ERC. Employers must track wages to avoid “double-dipping.”

Recovery startup businesses, introduced for 2021, can qualify without meeting the gross receipts or suspension tests. To qualify, an employer must have begun operations after February 15, 2020, and meet gross receipts criteria. This applies to the third and fourth quarters of 2021, with a maximum credit of $50,000 per quarter.

Gathering Required Information and Calculating the Credit

To claim the Employee Retention Credit, businesses must gather specific information and documentation. This includes detailed payroll records (W-2s, registers), gross receipts documentation for 2019-2021, and copies of government orders if qualifying under suspension.

Qualified wages include cash wages (hourly, salaried, vacation, taxable wages) and certain qualified health plan expenses. The definition of qualified wages and applicable caps vary between 2020 and 2021.

For 2020, the credit is 50% of qualified wages, with a maximum of $10,000 in qualified wages per employee for the year, resulting in a maximum credit of $5,000 per employee. For 2021, the credit rate increased to 70% of qualified wages, with a maximum of $10,000 in qualified wages per employee per quarter. This allows for a potential maximum credit of $7,000 per employee per quarter, or up to $21,000 per employee for the first three quarters of 2021.

Wage qualification depends on business size. For 2020, businesses with 100 or fewer full-time employees in 2019 could include all wages paid. For 2021, this increased to 500 or fewer. Larger employers could only count wages paid to employees not providing services due to suspension or decline.

Allocate qualified wages to correct quarters, especially for 2021 caps. Exclude wages used for PPP loan forgiveness to prevent “double-dipping.” Maintain thorough records to support calculations and substantiate claims in case of an IRS inquiry.

Completing the Claim Forms

Businesses claim the ERC or adjust prior returns using Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. A separate Form 941-X is needed for each quarter claimed.

On Form 941-X, provide your employer identification number (EIN), business name, and the specific quarter and year being corrected. Select Box 2 in Part 1 and Boxes 3 and 5d in Part 2.

Enter calculated qualified wages on Line 30 of Form 941-X, health plan expenses on Line 31a, and the refundable portion of the ERC on Line 26a. Ensure the total ERC (nonrefundable and refundable) is accurate. The nonrefundable portion reduces tax liabilities, while the refundable portion can result in a direct refund.

On page five of Form 941-X, provide a detailed explanation stating the amendment is for the ERC. This explanation should reference the specific line numbers affected and the cause of the adjustment.

Submitting Your Claim

After completing Form 941-X for each relevant quarter, mail the claim to the IRS. Specific mailing addresses vary by location and are found in Form 941-X instructions or on the IRS website.

Use a mailing method with proof of submission, such as certified mail or a private delivery service with tracking. This provides documentation for timely filing.

Before mailing, retain copies of all submitted forms and supporting documentation. This includes Form 941-X, worksheets, payroll records, government orders, and gross receipts data. This is important for audit purposes and future reference.

Ensure the claim reaches the correct IRS processing center. Attach any required supporting documents as per IRS instructions. The IRS implemented a processing moratorium on new ERC claims filed on or after September 14, 2023; claims submitted before this date are processed slowly.

Post-Submission Expectations

After submitting an ERC claim, expect varying processing timelines. The IRS has significant backlogs, and refunds can take several months, often exceeding eight months. Claims submitted before the moratorium are processed slowly.

Approved refunds are issued via direct deposit or paper check. Ensure banking information is current for direct deposit. The IRS has no statutory timeframe for processing refunds.

The IRS may request additional information or audit the claim. Respond promptly with all requested documentation to substantiate the claim. Failure to respond can lead to delays or disallowance. Maintaining thorough records is crucial for addressing IRS inquiries.

No “Where’s My Refund” tool exists for Form 941-X. Businesses rely on tax professionals or direct IRS contact for updates. Retain all documentation even after receiving the refund, as the IRS can review claims for several years.