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Employee Retention Credit for small businesses

NOTE: The Internal Revenue Service (IRS) has placed a moratorium on new Employee Retention Tax Credit applications through the end of the year. The halt to this program comes amid a surge in fraudulent claims and aggressive marketing practices to ineligible applicants. The agency is expected to put in place more safeguards for small business owners to protect them from unscrupulous entities.

The federal government created the Employee Retention Credit (ERC) in response to the detrimental effects of the COVID-19 pandemic on small businesses. As part of the CARES Act, the ERC offers tax credits to encourage more businesses to retain employees during the pandemic, as a temporary measure.

Below you will find more information about the tax credit and its eligibility requirements. 

Eligibility Criteria

You qualify for ERC if:​

  • Your business faced a shutdown or a drop in gross receipts during certain time periods in the pandemic​
  • Your business paid wages and health insurance premiums to your employees​
  • Your business received PPP assistance. 
    • However, the same wages cannot be used both to qualify for forgiveness of a PPP loan and as ERC Qualified Wages.​

Timeline

ERC tax credits apply to wages and health plan expenses paid out to (and on behalf of) employees within these time frames:

2020
  • Q2 2020: March 13, 2020 – June 30, 2020
  • Q3 2020: July 1, 2020 – September 30, 2020
  • Q4 2020: October 1, 2020 – December 31, 2020
2021
  • Q1 2021: Jan 1, 2021 – March 31, 2021
  • Q2 2021: April 1, 2021 – June 30, 2021
  • Q3 2021:  July 1, 2021 – September 30, 2021 

Calculating ERC for your small business

Gusto has developed a unique tool to help you calculate your ERC for qualified wages in 2020 and 2021.

How to claim the credit

After you calculate your credit, you may claim it in one of two ways:​

Option 1:

Claim the ERC as you file and submit the business quarterly payroll tax deposits electronically through IRS Form 941​.

  • If the ERC amount is less than the payroll deposits, then you hold back the credit difference as you submit the business payroll tax deposits; or​
  • If the ERC amount is more than the payroll deposits, then your business is eligible for an ERC Advance. ​
    • NOTE: To receive the ERC Advance, you must first complete and submit IRS Form 7200 electronically before you file the business quarterly payroll deposits ​
Option 2:

To claim the ERC every quarter (starting in the 2nd quarter of 2020), you must file an amended payroll tax return with IRS Form 941x on paper.​