How to Apply for the Employee Retention Tax Credit (ERC) in 2023
What is the ERC?
The Employee Retention Tax Credit offers retroactive relief to small-business owners who, while under huge financial pressure during the pandemic, continued paying their employees.
By filing for the credit, you could recoup up to $26,000 per employee you paid during the COVID-19 crisis.
But the gap between navigating IRS rules and actually getting money back can feel enormous. We’ll show you how to start an application to figure out if you qualify and, if so, how much money you’re entitled to.
Who qualifies for the Employee Retention Tax Credit in 2023?
The credit applies to most businesses and non-profit organizations that paid wages, tips, commissions and other compensation to W2 employees (not contractors). If a government order in early 2020 required you to reduce your business’s hours of operation, partially suspend operations, or temporarily shutter altogether, but you still paid employees during that time period, you probably qualify for the Employee Retention Credit.
Most small businesses, colleges, universities, and nonprofits that lost business as a result of government action while still paying employees meet these criteria—with two main exceptions:
- Your business was able to switch to remote work almost immediately after mandatory shutdowns.
- Your business was considered essential.
If you fall into either of these two categories, you probably can’t claim the ERC.
For example, if your food truck couldn’t operate as usual due to a city, state, or federal order but you still paid your employees until reopening, you should qualify. If your restaurant switched from in-person service to delivery-only and you still paid employees, your business should qualify.
But if your marketing team was able to switch directly from working in an office to working from home, your business likely doesn’t qualify.
Still not sure if your business can claim tax credits? An ERC-focused financial service like ERC Eligibility Specialists can help you decide if you’re eligible for the tax credit, then guide you through the ERC application process.
Which wages count toward the Employee Retention Credit?
Only qualified wages as well as employer-paid healthcare expenses paid during specific time frames can be used to claim the Employee Retention Credit, which was initially authorized in the 2020 CARES Act and later renewed. Here are the details, according to the IRS:
- March 13, 2020 through Dec. 31, 2020: 50% of wages up to $10,000 per employee.
- Jan. 1, 2021 through Sept. 30, 2021: 70% of wages up to $10,000 per employee per quarter in 2021.
Wages paid after Sept. 30, 2021, generally aren’t eligible for the tax credit, but wages paid up to that point can be applied toward the credit until 2024.
What is a recovery startup business?
One type of business can claim the Employee Retention Tax Credit for wages paid until Dec. 31, 2021: Recovery startup businesses.
The IRS’s definition of a recovery startup business is fairly limited, but you might own a recovery startup business if:
- Your business opened after Feb. 15, 2020.
- Your annual gross receipts within a specific time period average under $1 million.
These types of businesses might qualify for up to $50,000 for each quarter of wages paid.
Not sure if your business matches this description or not? An accountant or ERC-specific financial team like ERC Eligibility Specialists can help you figure out if your business qualifies as a recovery startup business.
How much money can you expect back from the ERC program?
After Congress renewed and expanded the Employee Retention Credit during the pandemic, small-business owners who qualified could claim up to $26,000 per employee.
Here's the cost breakdown: You can apply for 50% of up to $10,000 of an employee’s qualified wages paid between March 2020 and December 2020. Additionally, you can apply for 70% of up to $10,000 per employee for each of the first three quarters of 2021.
In other words, the maximum possible credit for 2020 is $5,000 for employee, and the maximum for 2021 is $21,000 per employee.
How do you apply for your Employee Retention Credits?
If you haven’t already claimed your tax credits for qualifying wages and are applying for the ERC retroactively, you’ll need to file either IRS Form 944-X or 943-X. (The form you need depends on the type of business you own.)
Note that these forms modify the payroll tax return documents you already submitted at the end of the relevant quarter—you can only claim the ERC on your payroll tax return, not an income tax return.
An accountant, tax professional, or dedicated ERC specialist can help you figure out which documents you need to submit for the credit and how to fill out the correct tax form for your business.
Employee Retention Tax Credit (ERC) Takeaways
The Employee Retention Tax Credit puts money directly back in the hands of business owners who stretched and sacrificed to stay afloat during the most challenging months of the pandemic. For many businesses, the credit could total up to $26,000 per employee. That's real money you can reinvest in your business immediately—and remember, unlike a PPP loan, you don't have to pay your ERC money back.
Depending on your business's situation, the deadline to apply for the ERC could be 2024. But since it could take 16 months (or more!) to receive your money from the IRS, the sooner you apply, the better. Get started today.
Tax-filing deadlines often arrive sooner than you think. Make sure you’re up on the latest tax schedule deadlines for small-business taxes.
Employee Retention Credit FAQ
Most businesses that fully or partially stopped operations, reduced their business hours, or demonstrably experienced a 51% or more drop in gross receipts as a result of local, federal, or state mandates qualify for the ERC.
No, you do not need to pay back the ERC. Unlike the Paycheck Protection Program, or PPP, the ERC is not a loan. Instead, it’s a refundable tax credit that gives you back a portion of wages you paid employees as long as you meet certain criteria.
The reimbursements you receive from the ERC aren’t considered taxable income. You won’t be taxed on the money you receive, and you shouldn’t include it in your gross income for the tax year in which you receive the money. However, the refund you get from the ERC does impact deductible wages for the tax year in which you paid ERC-qualifying wages.
Talk with a CPA, bookkeeper, or ERC specialist about how applying for the ERC requires you to adjust deductions on your 2020 or 2021 payroll tax returns.
You can claim your ERC reimbursement by submitting IRS Form 943-X or 944-X. (The form you need depends on the type of business you own.) These tax forms are payroll tax return modifications and allow you to amend tax returns you filed in 2020 or 2021.
If you just filed to get your ERC reimbursement, you’ll likely wait at least 30 days to get your refund. However, because the IRS is currently understaffed, it could take up to 16 months for you to see your ERC money.
No, the reimbursement you get from the ERC doesn’t count as taxable income.
Yes, business owners who meet certain conditions qualify for the ERC. If your business was impacted by government-mandated shutdowns in 2020 or 2021 and you continued to pay employees, you might qualify.
Yes, you can get a PPP loan and still apply for an ERC reimbursement. However, the wages you included in your application for a PPP loan (and PPP forgiveness) cannot be the same wages used to apply for the ERC. (In other words, if you already used a PPP loan to pay employees and the loan was then forgiven, you can’t file for the ERC based on wages you paid via money from the loan.)
You’ll submit a series of tax forms to apply for the ERC, starting with IRS Form 941, which is your quarterly federal tax return, for the quarters in which you paid ERC-qualifying wages. Along with Form 941, you’ll need:
- Form 7200 (Advance Payment of Employer Credits Due to COVID-19)
- Any PPP loan applications, including applications for loan forgiveness
- Any financial records related to money your business received to cope with COVID-19, including grants and government-funded medical leave credits
- Quarterly financials for 2019, 2020, and/or 2021
- A record of the government order that caused your business to shut down or partially suspend operations
Yes, as long as you are eligible and have not already claimed it, you can still claim the employee retention credit in 2023.
At Business.org, our research is meant to offer general product and service recommendations. We don't guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services.