When Does the Employee Retention Credit End?

The Employee Retention Credit (ERC) was established as a refundable tax credit to assist businesses that maintained payroll during the COVID-19 pandemic. Introduced under the CARES Act, it provided financial relief by offsetting qualified wages and certain health plan expenses. Understanding the credit’s timeline and conclusion is important for businesses that claimed it or are considering retroactive claims.

Key Dates for the Employee Retention Credit

The Employee Retention Credit was initially available for qualified wages paid between March 13, 2020, and December 31, 2020. The Consolidated Appropriations Act, 2021, extended the credit for wages paid through June 30, 2021. The American Rescue Plan Act of 2021 further extended it through December 31, 2021.

However, the Infrastructure Investment and Jobs Act (IIJA) in November 2021 retroactively terminated the ERC for most employers. This meant the credit effectively concluded for wages paid after September 30, 2021, making many employers ineligible for the fourth quarter of 2021.

An exception was made for “recovery startup businesses,” which could still claim the credit for wages paid through December 31, 2021. A recovery startup business is an employer that began operations after February 15, 2020, and meets specific gross receipts thresholds.

Eligibility Requirements

To qualify for the Employee Retention Credit, businesses needed to meet one of two primary criteria. The first involved demonstrating a significant decline in gross receipts. For 2020, an employer qualified if its gross receipts for a calendar quarter were less than 50% of its gross receipts for the same quarter in 2019. For 2021, the threshold was less than 80% of its gross receipts for the same quarter in 2019. Employers could also elect to compare the immediately preceding calendar quarter to the corresponding quarter in 2019.

The second method involved a full or partial suspension of operations due to governmental orders. These orders must have limited commerce, travel, or group meetings due to COVID-19. The suspension needed to have more than a “nominal” effect, significantly impacting the business’s ability to operate. Examples include reduced hours, supply chain disruptions, or capacity limitations. The order must have been from an appropriate governmental authority, and its impact, not just its existence, determined eligibility.

The employer’s size, based on average full-time employees in 2019, also influenced which wages qualified. For 2020, employers with over 100 full-time employees could only claim the credit for wages paid to employees not providing services. For 2021, this threshold increased to over 500 full-time employees, with “large” employers claiming wages for non-service employees and “small” employers claiming wages for all employees.

How to Claim the Credit

Businesses claim the Employee Retention Credit for past eligible quarters by filing Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund. This form corrects errors on a previously filed Form 941. When completing Form 941-X, employers must identify the specific calendar quarter and accurately report qualified wages and the corresponding credit amount. This involves detailing original and corrected amounts to reflect the ERC.

Adhering to the statute of limitations for amending returns is important. Employers generally have three years from the date the original Form 941 was filed or two years from the date the tax was paid, whichever is later, to file Form 941-X. For example, a Form 941 filed for the second quarter of 2020 on July 31, 2020, would have a deadline of July 31, 2023, to file an amended return.

Important Considerations for Claims

Thorough documentation and meticulous record-keeping are important for any business that has claimed or plans to claim the Employee Retention Credit. Businesses should retain comprehensive payroll records detailing qualified wages and credit calculations, including documentation supporting employee numbers and wages paid. If eligibility was based on a full or partial suspension of operations, businesses must keep copies of the specific governmental orders and document their impact, demonstrating more than a nominal effect.

For eligibility based on a decline in gross receipts, detailed financial records comparing quarterly revenues to corresponding 2019 quarters are important. The Internal Revenue Service (IRS) may audit ERC claims, and businesses must be prepared to substantiate their eligibility and the accuracy of their claimed credit amounts. Organized records can significantly streamline this process and help defend the claim.

Any interaction with other COVID-19 relief programs, such as Paycheck Protection Program (PPP) loans, also requires careful consideration. While initially, wages used for PPP loan forgiveness could not also be used for ERC, this restriction was later relaxed, allowing some overlap. For complex situations or substantial claims, consulting with a qualified tax professional is advisable to ensure compliance and accuracy.