Rev Proc 2021-33: ERC Safe Harbor for PPP Recipients
Learn how Rev Proc 2021-33 allows businesses to claim the ERC on wages that were included, but not required, for PPP loan forgiveness.
A rule of the COVID-19 relief programs prevents employers from using the same wage expenses for both Paycheck Protection Program (PPP) loan forgiveness and the Employee Retention Credit (ERC). However, IRS guidance provides a method for employers who reported more payroll costs on their PPP loan forgiveness application than necessary to retroactively free up those excess wages for the ERC. This corrects an over-reporting of payroll without changing the rule against “double dipping.”
Separately, Revenue Procedure 2021-33 provides a safe harbor allowing employers to exclude the amount of their PPP loan forgiveness from gross receipts when determining ERC eligibility. This helps businesses qualify for the credit based on a revenue decline and is distinct from the guidance that allows for the reallocation of wage expenses. The ERC program has ended and is only available for qualified wages paid before October 1, 2021, for most employers. The deadline to file claims for 2020 has passed, and the final deadline to file amended returns for 2021 quarters is April 15, 2025.
Eligibility to Reallocate Wages
To reallocate wages for the Employee Retention Credit, a business must have received a PPP loan and subsequent forgiveness from the Small Business Administration (SBA). The employer must also have paid qualified wages eligible for the ERC during the relevant quarters.
The business must have reported payroll costs on its forgiveness application that exceeded the minimum needed to have the loan forgiven. This often occurred when businesses cautiously listed all payroll costs on the application, even if a smaller amount was sufficient.
Required Calculations and Documentation
To calculate wages available for the ERC, you need your PPP Loan Forgiveness Application (SBA Form 3508, 3508EZ, or 3508S), the forgiveness notification, and detailed payroll records to substantiate your claim.
The first step is to determine the minimum payroll cost required for your forgiveness. Under PPP rules, at least 60% of the forgiven loan amount must be from payroll costs, so the minimum required payroll is 60% of the total loan amount that was forgiven. For example, if a $100,000 loan was fully forgiven, the minimum required payroll cost was $60,000.
Next, compare this minimum required payroll cost to the total payroll cost you reported on your PPP Loan Forgiveness Application. The difference between the amount reported and the minimum required is the amount of “excess” wages available for the ERC. If the business in the previous example reported $95,000 in payroll costs, it would have $35,000 in excess wages ($95,000 – $60,000) available for the ERC calculation.
Claiming the Credit on Reallocated Wages
To claim the ERC on the newly available wages, you must file an amended payroll tax return for each quarter in which the wages were paid. For most employers, this means preparing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, for each applicable quarter.
When completing Form 941-X, you will enter the non-refundable and refundable portions of the credit in Part 3 and report the qualified wages on the designated worksheets. In Part 4, you must explain that you are claiming the ERC on wages no longer allocated to PPP loan forgiveness per IRS guidance. After completing a separate Form 941-X for each quarter, mail the forms to the IRS service center indicated in the instructions.
On September 14, 2023, the IRS announced an immediate moratorium on processing new ERC claims to combat fraudulent submissions. While the processing of claims filed before the moratorium has continued, all new and pending claims are subject to enhanced compliance reviews and are experiencing significant delays.