When Did the Employee Retention Credit Start?

The Employee Retention Credit (ERC) was a refundable tax credit designed to encourage businesses to keep employees on their payroll during the COVID-19 pandemic. It provided financial relief to eligible employers by offsetting labor costs and reducing layoffs. The credit evolved through various legislative acts, altering its scope, eligibility, and maximum benefits. This article details the credit’s legislative history and how businesses could determine eligibility and claim it.

Origin and Evolution of the Employee Retention Credit

The Employee Retention Credit was established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. It was a refundable payroll tax credit for wages paid after March 12, 2020, and before January 1, 2021. The credit was 50% of qualified wages, up to $10,000 per employee for the year.

The Consolidated Appropriations Act, 2021, on December 27, 2020, extended the credit for wages paid from January 1, 2021, through June 30, 2021. The credit percentage rose to 70% of qualified wages, and the limit increased to $10,000 per employee per calendar quarter. This allowed up to $7,000 per employee per quarter for the first two quarters of 2021.

The American Rescue Plan Act (ARPA) on March 11, 2021, extended the ERC through December 31, 2021, maintaining the 70% credit rate and $10,000 qualified wage limit per employee per quarter. This extension included provisions for “recovery startup businesses” and “severely financially distressed employers” for the third and fourth quarters of 2021.

However, the Infrastructure Investment and Jobs Act, on November 15, 2021, retroactively terminated the ERC for most employers. This ended the credit for wages paid after September 30, 2021, for all employers except recovery startup businesses. Thus, for most businesses, the ERC was available for qualified wages paid through the third quarter of 2021.

Determining Eligibility for the Credit

Businesses could qualify for the Employee Retention Credit through two paths: a significant decline in gross receipts or a full or partial suspension of operations due to a governmental order. Criteria varied by credit period.

For 2020, a significant decline meant gross receipts for a quarter were less than 50% of the same quarter in 2019. Eligibility continued until gross receipts exceeded 80% of the 2019 quarter. For 2021, the threshold was 20% compared to the same 2019 quarter. Alternatively, employers could compare gross receipts to the immediately preceding quarter if that quarter’s receipts were less than 80% of the corresponding 2019 quarter.

The second path involved a full or partial suspension of operations due to governmental orders limiting commerce, travel, or group meetings. Business operations were suspended by governmental restrictions. Examples: mandatory shutdowns, capacity limits, or hours restrictions. A partial suspension occurred if a business’s ability to operate was hindered, e.g., a restaurant limited to takeout.

“Qualified wages” included wages and compensation subject to social security and Medicare taxes, plus the employer’s share of qualified health plan expenses. For 2020, employers with over 100 full-time employees in 2019 could only count wages paid to employees not providing services due to suspension or decline. Employers with 100 or fewer full-time employees could count all wages. For 2021, employers with over 500 full-time employees in 2019 could only count wages paid to employees not providing services, while smaller employers (500 or fewer) could count all wages.

Initially, businesses with a Paycheck Protection Program (PPP) loan were not eligible for the ERC. However, the Consolidated Appropriations Act, 2021, retroactively allowed employers to claim both, provided wages were not double-counted. For the third and fourth quarters of 2021, “recovery startup businesses” were eligible for a maximum credit of $50,000 per quarter, regardless of gross receipts decline or suspension. A recovery startup business began operations after February 15, 2020, with average annual gross receipts not exceeding $1 million.

Claiming the Employee Retention Credit

Once eligibility was determined, employers claimed the credit through federal employment tax returns. For past quarters, businesses used Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. This form corrects errors on previously filed Forms 941 or claims refunds for overpaid employment taxes.

To file Form 941-X, employers calculated qualified wages and the corresponding credit for each eligible quarter. This involved referencing payroll records and documentation (e.g., gross receipts, governmental orders) supporting eligibility. The form requires entries for adjustments to wages, taxes, and the ERC amount, aligning the claim with eligibility rules.

After calculations, employers submitted Form 941-X to the Internal Revenue Service (IRS). Submission typically involved mailing. Retain copies of all submitted forms and supporting documentation for future reference or IRS inquiries.

Employers should maintain thorough documentation to substantiate ERC claims. This includes payroll records (wages, health plan expenses, employee numbers). Businesses also need to keep records of gross receipts, governmental orders leading to suspension, and other eligibility information. These records are essential for IRS audits or information requests.

Upon processing a valid claim, the IRS typically issued a refund check or applied the credit as an offset against future employment tax liabilities. Processing times for ERC claims varied, often taking months or longer. Employers should be prepared for potential IRS correspondence or audits, where further proof of eligibility and calculations may be requested.