To be eligible for the Employee Retention Credit (ERC) in 2021, an employer needed to meet at least one of three tests: experiencing a significant decline in gross receipts, having operations fully or partially suspended by a government COVID-19 order, or qualifying as a recovery startup business. The credit applied to wages paid between January 1 and September 30, 2021 for most employers, and through December 31, 2021 for recovery startup businesses only.
The Gross Receipts Decline Test
For any quarter in 2021, an employer qualified if its gross receipts for that quarter were less than 80% of the gross receipts from the same calendar quarter in 2019. In other words, the business needed to show at least a 20% drop in revenue compared to the matching 2019 quarter. If the business didn’t exist in 2019, it could use the corresponding 2020 quarter as the comparison period instead.
This was a more generous threshold than the 2020 version of the credit, which required a 50% decline. The quarter-by-quarter structure meant a business could qualify for one quarter of 2021 but not another, depending on how its revenue fluctuated.
The Government Order Suspension Test
An employer also qualified if a federal, state, or local government order related to COVID-19 caused a full or partial suspension of its business operations. This didn’t require a complete shutdown. A partial suspension counted as long as more than a nominal portion of the business was affected, which the IRS defines as at least 10% of the business measured by either gross receipts from that segment or the total hours employees spent working in it.
If the business could still operate but had to modify how it delivered goods or services, it could qualify if the government order caused at least a 10% reduction in its ability to provide those goods or services. Simple behavioral changes like making store aisles one-way or requiring masks did not meet that threshold on their own.
Several situations did not count as a qualifying suspension:
- All employees were able to telework and the business continued operating normally.
- Customers were affected by a stay-at-home order, but no orders directly applied to the business itself.
- The business voluntarily closed or reduced hours without a government mandate requiring it.
If a government order caused a suspension during only part of a calendar quarter, the employer was considered eligible for that entire quarter. However, the credit could only be claimed on wages paid during the actual suspension period, not for the full quarter.
Recovery Startup Businesses
A third path to eligibility opened in the second half of 2021 for recovery startup businesses. This category covered employers that began carrying on a trade or business after February 15, 2020, and had average annual gross receipts under $1 million for the three tax years before the quarter in question.
For the third quarter of 2021 (July through September), a recovery startup business could only use this category if it did not already qualify under the gross receipts decline test or the government order test. For the fourth quarter (October through December), that restriction was removed, meaning a recovery startup could claim the credit regardless of whether it also met the other eligibility criteria.
Recovery startup businesses were the only employers that could claim the ERC for wages paid in Q4 2021. The Infrastructure Investment and Jobs Act, signed in November 2021, ended the credit early for all other employers after September 30, 2021.
Which Employers Were Excluded
Federal, state, and local government entities were not eligible for the ERC. Self-employed individuals could not claim the credit on their own self-employment earnings, though they could claim it on wages paid to their employees if the business otherwise qualified.
Wages paid to certain related individuals also did not count toward the credit. If an employee was a majority owner of the business (owning more than 50%), or was related to a majority owner (spouse, child, sibling, parent, or other close family member as defined by tax rules), those wages could not be treated as qualified wages for ERC purposes.
How the Credit Worked in 2021
For 2021, the ERC was worth 70% of qualified wages per employee, up to $10,000 in wages per quarter. That translates to a maximum credit of $7,000 per employee per quarter, or up to $21,000 per employee across Q1 through Q3. Recovery startup businesses that qualified for Q4 as well could potentially reach $28,000 per employee for the full year, though recovery startups were capped at $50,000 in total credits per quarter.
Unlike the 2020 version, which limited the credit to employers with 100 or fewer full-time employees, the 2021 rules expanded the threshold to 500 or fewer average full-time employees. Employers at or below that size could claim the credit on wages paid to all employees, whether they were working or not. Employers with more than 500 full-time employees could only claim the credit on wages paid to employees for time they were not providing services.
Interaction With PPP Loans
Employers who received Paycheck Protection Program (PPP) loans were still eligible for the ERC in 2021, but the same dollar of wages could not be counted toward both programs. If certain wages were used to justify PPP loan forgiveness, those specific wages could not also be treated as qualified wages for the ERC. In practice, this meant employers needed to carefully allocate which wages went toward PPP forgiveness and which went toward the ERC to maximize the benefit of both.
Claiming the Credit Now
The ERC is claimed by filing an amended quarterly employment tax return (Form 941-X) for the relevant quarter. The standard deadline to amend a return is three years from the original filing date, which for most 2021 quarters means the window closes in 2025. The IRS has been processing ERC claims slowly and has flagged a large number of claims it considers improper. If you filed a claim that may have been based on incorrect eligibility, the IRS has offered a voluntary withdrawal process and a settlement program to resolve those situations with reduced penalties.