Employee Retention Credit Guide: How to Claim ERC in 2023

IRS Enforces Moratorium on New Employee Retention Credit (ERC) Claims

The IRS has enacted an immediate moratorium on processing new Employee Retention Credit (ERC) claims, effective until at least December 31, 2023. This step is taken to shield small businesses from potential scams and misuse of ERC claims. Concerns have arisen regarding the eligibility of a significant number of new ERC claims, and businesses have faced pressure and scams from aggressive promoters.

While previously filed ERC claims will continue to be processed, longer processing times are expected due to increased compliance reviews, potentially lasting up to 180 days. The IRS is actively pursuing criminal cases against questionable ERC claims, with several convictions already secured. The IRS is also developing initiatives, including a settlement program and a special withdrawal option for unprocessed claims, to further protect taxpayers and the ERC program's integrity.

In one of the most sweeping business stimulation measures in the history of the United States, the U.S. Congress instituted the Employee Retention Credit (ERC) as part of the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020. Keeping workers compensated was of immediate concern to lawmakers in the face of a raging COVID-19 pandemic. At its core, the Employee Retention Credit was designed to incentivize hard-pressed companies to give their employees much-needed financial relief. In summary, the refundable tax credit offsets payroll taxes assessed against a firm if that firm carries its employees during a period of shutdown or reductions. Eligible employers can obtain this benefit, and enjoy this refundable payroll tax credit.

how to apply for employee retention credit

What Is the ERC

The U.S. Internal Revenue Service, or IRS, has a charge over granting the ERC. While the eligibility period was originally from March 2020 to December 2021, the American Rescue Plan Act retroactively terminated that period to September 2021. This means that any eligible employer can claim the Employee Retention Tax Credit if it can demonstrate the detrimental effects of the pandemic on gross receipts during that time on its operations. The IRS will evaluate the evidence and decide whether to issue the credit and will want to see that business was adversely affected by the tax credits.

When the agency approves a business for the Employee Retention Credit, it will issue the credit according to a specific calculation regime that accounts for the number of affected employees and their respective employee wages. First of all, any wages paid from the Payroll Protection Program (PPP), which is another CARES provision, are not qualified wages for the ERC. If the company was paying non-active employees during all or some of the four fiscal quarters of 2020. If furloughed employees received their wages during any calendar quarter in 2020, IRS credits 50 percent to the payroll tax obligation, capped at $5,000 per worker; for any 2021 quarter, the percentage is 70 percent with a maximum of $7,000 per wage-earner per quarter.

Can I Apply for the ERC in 2023?

Yes, your business can indeed file for an ERTC credit in 2023. Eligible employers can file as late as April 2025 under certain circumstances. Companies have up to three years from the original filing of Form 941 during the period covered by ERC. This means that if you closed or downsized due to COVID in July of 2020, you can claim the tax credit as late as April of 2024 – since quarterly employment taxes are officially counted toward the following April 15th. Likewise, any claims from 2021 must be made by April 2025.

Benefits of the Employee Retention Credit

employee retention credit

Keeping sidelined employees on active payrolls during the pandemic was deemed an important part of economic survival by the U.S. Congress. Offsetting the financial pain from doing so is the aim of the Employee Retention Credit. In suffering a significant decline in economic activity, small businesses garnered certain benefits:

1. Employers need not go through a long and arduous process of re-hiring when the pandemic and its restrictions recede. Personnel were never separated from the company so this spares the business a slew of human resources red tape. The staff is intact and ready to return when notified.

2. Employers are eligible for the retention tax credit ERTC from $5,000 to $7,000 per employee for each quarter they were not working.

3. Claims on wages paid do not have to wait until April. They can be submitted immediately, if necessary, to lessen short-term payroll costs to the eligible employer.

4. Although the paycheck protection program, or PPP loan, funds are not included among the monies in the ERC calculations, small businesses can benefit from both programs as long as each is applied to a separate calendar quarter or separate employees. Alternatively, qualified wages might be claimed if PPP loan forgiveness is received. This would effectively remove PPP as a factor.

5. The criteria to file for an employee retention tax credit are more flexible than before. A drop of 20 percent in gross receipts in any given quarter – compared to the same calendar quarter in 2019 – constitutes a significant decline in income according to IRS guidelines.

6. Ease of process – if you can file a form 941 each calendar quarter, this is enough for the Internal Revenue Service to decide regarding eligibility. Your payroll provider can also do this since it already possesses the necessary information.

7. In some cases, the credits granted surpass the payroll tax paid, meaning that your business may be due an Employee Retention Credit refund.

How Does an Employee Retention Credit Work in Illinois?

Like the national government, state authorities, too, moved to soften the economic blow of the COVID-19 pandemic through a combination of loans, grants, moratoriums, and tax breaks. The State of Illinois was very active in this regard. A company doing business within the Illinois state boundaries might be eligible for a payroll credit of $26,000 per employee. The period of eligibility runs through the second, third, and fourth quarters of 2020. Furthermore, the tax credit can value up to 50 percent of each eligible employee’s salary. In some cases, the company can receive a credit toward future tax bills or get a refund from the Department of Revenue.

What Employers Are Eligible for the Employee Retention Tax Credit?

A broad range of businesses and other institutions can avail themselves of the ERTC. This is due to the eligibility expansion provided by the American Rescue Plan Act of 2021. The criteria for qualification are simple. Either the organization's regular operations were significantly interrupted because of COVID restrictions, or they experienced a critical decline in revenue as a result of the coronavirus. The burden on business owners is to connect the dots between operational cessation or income decline and the COVID-19 pandemic.

Business Disruption

An establishment that either curtailed or stopped operations because of a government dictates or ordinance is eligible for some offsetting credit relative to the time its functions were diminished or stopped altogether. It need not always be the direct result of public order, but instead an economic after-effect.

These are legitimate recipients of credits for portions each quarter they were hobbled or shut down. For example, some companies were shut down completely in the third and fourth quarters. However, this eligibility is not absolute. Other considerations can render you to not be an eligible employer:

  • If the company or agency performs an essential service and remains at full capacity unless a supply shortage or other problem limits the services.
  • If the organization can do business while its workforce makes their contributions remotely using computer technology. Many firms were able to do this in 2020-2021, and thus employee wages were paid.  

Shrunken Revenue

how to apply for employee retention credit retroactively

A major drop in annual or calendar quarter gross receipts also suggests company eligibility for the ERTC. An IRS rule instituted in the summer of 2021 allows employers to exempt any PPP forgiveness amounts from the annual gross receipts of an organization. Fortunately, it's easy to perform a gross receipts test.

Other exclusions are monies from the Shuttered Venue Operators Grant or an allocation from the Restaurant Revitalization Fund. These refer to programs targeted at eateries, taverns, clubs, recreational facilities, sports venues, and other places that need customers present and on-site to earn money, and thus can qualify as eligible employers. In other words, there is no way such businesses can function with staff working remotely.

Thus, public laws and ordinances that prevent gathering cause a severe loss of income for such entities. It helps them to know how to apply for the Employee Retention Credit in anticipation of re-opening and fielding a full workforce.

Common Industries that Qualify for ERC

While eligible employers are determined on a case-by-case basis, there are business and public sectors that are more likely to receive the ERTC than others. Eligible employers include:  

1. Car Washes, Auto Repair, and Body Shops - the pandemic put a damper on traffic as more people worked from home, if at all. This slowed business for automobile servicing businesses and caused them to need fewer full-time employees and fewer wages paid.

2. Restaurants and Bars - gathering places where customers can socialize and enjoy food and drinks were shut down by government authorities in many jurisdictions, while others experienced a significant decline in business. In some places, they were able to remain open, but with severe restrictions on crowd size, with an emphasis on social distancing, and wages paid dropped significantly.  

3. Religious Buildings - houses of worship were also subject to closure by the government to inhibit the spread of the coronavirus in close-quarter environments. This includes sacred services and regular full-time employees that work through the week.

4. Homebuilders, Construction Firms, and Contractors - many building and maintenance professions suffered from a slowdown during COVID-19. With so many unknowns about COVID, residential and commercial property business operations were put on hold, and wages paid dropped.

5. Moving and Shipping Companies - these businesses experienced a significant decline in revenue along with a decline in real estate market activity and commercial transactions.

Similarly, hotels, dry cleaners, health clubs, and retailers suffered a decline in customers and income. Many private healthcare practitioners resorted to telephone examinations and diagnoses, further reducing their incomes from pre-COVID levels. Patients delayed regular dental cleanings and check-ups, as well. Meanwhile, hospitals prohibited visitors, so cafeterias and coffee shops within were shuttered for months.

What Are Qualified Wages for the Employee Retention Credit?

how to apply for employee retention tax credit

If the employer is an eligible ERTC recipient, whatever wage payments to employees made after March 12, 2020, and before January 1, 2021, qualify. This assumes that the business either suffered a hard reduction in income or its workings were shut down altogether. The ERTC constitutes a tax refund and can give back up to $26,000 per employee ($11,000 or vicinity, most often) contingent upon if wages qualify, health benefits, paid sick leave, and other human resources expenses that business owners invested. The ERTC is open to all categories of business, independent of magnitude or market sector.

How to Calculate Your ERTC Amount: an Example

How to apply for an Employee Retention Tax Credit begins with understanding how much a business is due. Working out the figures that constitute the ERTC is best done by way of illustration, and you must start with how many full-time employees you have:

For example, small businesses with 10 full-time employees pay $50,000 to each employee annually. Meeting the criteria for ERTC for all of 2020 and three quarters of 2021, the company pays each worker $12,500 per quarter. This totals compensation of $125,000 every three months. The ETRC credits 50 percent of the total quarterly payouts, i.e., $62,500. So, the company would be credited $6,250 per employee for the year 2020.

As noted above, however, the ETRC calculations were adjusted for its life. Accordingly, the 2021 factor increased from 50 percent of quarterly wage disbursements to 70 percent. $125,000 x 70 percent yields $87,500, or $87,500 for each employee.

How to Apply for ERC in 2023

how to claim the employee retention credit

Following these steps will increase the likelihood of a successful ERTC claim:

1. Make sure your organization qualifies for the ERC. This means meeting the criteria for affected business, lost income, business size, etc. Assess if there are eligibility standards that must be adhered to before applying. Research if any measures need to be taken before submission to ensure qualifying parameters are met and the maximum amount of benefits can be obtained. Familiarize yourself with key factors such as requirements regarding the number of employees and other operational aspects due to the varying shapes and size characteristics of businesses so you don't miss out on access to alternative support funds available.

2. Make sure you filed an IRS form 941 for each of the affected calendar quarters for which you will seek credit. k. To do this, first, locate and then complete the accompanying worksheet(s). After completing the necessary documentation, double-check to ensure you entered all numbers accurately before filing form 941. By doing so, when it comes time to submit your credit claim, you will be sure you have properly and effectively maneuvered through this important step.

3. File a 941-x form to make the adjustments for the ERC tax credit. In prior times, this form would apply to employees who requested extended sick leave or family leave. The CARES Act, however, expanded its scope to include those employees who were inactive due to legal and economic pressures related to the COVID-19 coronavirus. Form 941-x is receivable up to three years after the quarters in question. This means that you can petition through 2024 to claim the credit for 2020.

4. Confirm that the company has no more than 500 full-time workers on staff. The ERC is aimed at small to medium-sized firms that would otherwise maintain smaller capital reserves. This credit can provide great support and relief if strategically leveraged by firms that are not larger than 500 employees in size. It could be the difference between maintaining a thriving workforce and needing to reduce it significantly, as well as enabling these organizations to retain employee talent as well. The ERC is an important resource for small to medium organizations whose staff sizes cap out at 500, granting valuable economic aid and helping ensure employees remain employed during this period of unrest.

5. Those companies seeking an immediate refund of Social Security taxes already paid can file a Form 7200. Like the 941-x, Form 7200 was created to provide for employees in need of family and/or medical leave. Now, it is useful as a vehicle to request advance payment of credits earned. Form 7200 is easy to fill out, and a professional probably isn’t needed.

Get Expert Help Navigating the ERC Credit from CPA Firm!

There is more to applying for and getting the Employee Retention Tax Credit than simply having qualified wages. Fortunately, there are tax professionals who are seasoned and trained in the ins and outs of this important employment tax credit.

Employee retention credit services are available in the Chicago area and nationwide at If you believe your firm meets the eligibility requirements, reach out to us today for a consultation, so we can help with everything, including the PPP loan forgiveness application, and get you the tax credits you deserve.

The Lewis CPA firm knows the Employee Retention Credit. As professional accountants and tax specialists in practice for over 35 years, we can help you discover if your business is eligible for the ERC and help you claim this helpful benefit. Reach out to us to find out how, and whether you qualify or not, there is no charge to contact us.

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Do I have to pay back the Employee Retention Credit?

Some business owners confuse the Jobs Act, the ERTC, and PPP. Whereas a PPP loan is something that employers qualify for, by providing PPP loan documents, carrying the potential for PPP loan forgiveness that allowed for eight weeks of personnel costs, benefits included such as qualified health plan expenses, and health insurance costs, the ERTC is a payroll tax credit that relieves some of the expenses born by an employer on behalf of a workforce. As reimbursement for not laying people off, the government lifts some of the financial burden from small business owners through the ERTC. Therefore, no recipient owes anything back after securing the ERTC. Whereas PPP is a loan, ERTC is a grant and just a payroll tax credit that helps business owners alleviate the pain of payroll costs.

Is the Employee Retention Credit only for Full-Time Employees?

When calculating the ERTC credit, employers may use qualified wages of both part and full-time associates. However, in so formulating, the company may not exceed $10,000 in wages for any one worker in a given quarter. Also, health insurance costs are included in compensation.

What is the deadline to file for the Employee Retention Tax Credit?

Since the ERTC was subject to adjustments and tweaks, its durations and deadlines did not remain fixed throughout its lifetime. In late 2021, the sunset of the credit was moved from 12/31/2021 to 9/30/2021. Important to understand is that this modification simply shortened the number of months (or quarters) covered by ERTC.

It in no way prohibits anyone from still filing to get the benefit for those quarters covered. However, the time frame to amend a business tax return is not open-ended. The IRS usually allows for up to three years to elapse before such revisions are no longer accepted.

Is ERC taxable income?

The purpose of the ERTC is to reduce the tax burden rather than add to it. It allows a full-time employee or part-time one to keep getting paid, in whole or in part, despite business interruptions. Those wages are then written off by employers as business expenses deductible under IRS rules. In any event, receiving a credit against Social Security taxes is not defined as taxable income by the Internal Revenue Service. In short, the ERTC takes unexempted taxes that were previously collected and returns them to the employer as exempted during the quarter for which they applied for the credit.

What are considered gross receipts for ERC?

Since the ERC requires a specific drop in gross receipts to be eligible, it makes sense to define the term. For small businesses, these would include:

  • Total sales of goods and services offered by the company;
  • Yields and dividends from business investments;
  • Any rents received from the use of company-owned properties and facilities;
  • Royalties and annuities;
  • Non-profit entities should include donations and grants.

The revenue recognition accounting standard applies. This means that among the gross receipts is income that is showing on the books but has yet to be collected. This is helpful to small businesses where the collection efforts were slowed due to the COVID-19 pandemic. Besides a sinking of gross receipts, an enterprise can gain eligibility by proving it closed or cut back by government order.

Can I get both the ERC and PPP loans?

A company can benefit from both ERC and PPP as long as the two programs do not overlap. Important to note is that you cannot use wages that originated with the government to get a credit from the government. So, when entering wages that were paid out to inactive employees during a particular calendar quarter, you may not include the eight to 10 weeks of pay that came from a PPP loan. Great care must be taken to keep the two benefits separate from one another. If the payment protection loan was forgiven, on the other hand, you should check with your accountant if those weeks’ wages are eligible for the ERC benefit.

What can I spend the employee retention credit on?

The Employee Retention Credit is not a conventional tax refund. More accurately, the ERTC is a recompense made for the singular purpose of retaining workers during business slumps related to the coronavirus pandemic. So, these funds must go to salaries or wages, directly or indirectly. Employers who fully funded staffer compensation during the pandemic, without any credits or federal assistance, must nevertheless reserve any monies accrued using the ERTC for employee remuneration. This boost might free up funds directed at other line items in a company budget.

How much is the ERTC credit in 2022?

As demonstrated above, the amount received for the ERTC is dependent on how many quarters a company qualifies for what the total employee compensation amounts to, and which year the subject quarters fell within (2020 or 2021?). Remember, though, that on a per-employee basis, the federal government does not reimburse above $26,000. With this in mind, business owners can determine if the ERTC will provide needed recompense for monies lost during the worst of COVID-19.

How long does it take to get an employee retention credit refund?

The answer to this question is contingent on the date of filing and the complexity of the credit application as represented by IRS Form 941 X. With those factors in mind, business owners generally receive the ERTC reimbursement as early as six and as late as 10 months from the date of filing. Requests for the maximum tax credit may be more or less complex due to variables such as:

  • Whether or not the company participates in a PPP loan;
  • Whether or not the business is getting any credits under the Families First Coronavirus Response Act;
  • Whether or not the business gets a Work Opportunity Tax Credit;
  • Whether or not the company collects paid family and medical leave under section 45S of the IRS Code.

These conditions may or may not disqualify an otherwise eligible employer from enjoying this valuable tax credit.

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