Frequently asked questions about the Employee Retention Credit

A1. No.

A2. Some promoters tell taxpayers that every employer qualifies for ERC. This is not true. Eligibility for the ERC depends on your specific facts and circumstances.

There are very specific eligibility requirements for claiming the ERC.

Eligible employers can claim the ERC on an original or amended employment tax return for qualified wages paid between March 13, 2020, and December 31, 2021. However, to be eligible, employers must have either:

• Sustained a full or partial suspension of operations due to an order from an appropriate governmental authority limiting commerce, travel or group meetings because of COVID-19 during 2020 or the first three quarters of 2021, or
• Experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021, or
• Qualified as a recovery startup business for the third or fourth quarters of 2021.

A self-employed individual who has employees and who otherwise meets the requirements to be an eligible employer may be eligible for the ERC based on qualified wages they paid to employees. Self-employed individuals can't include their own self-employment earnings or wages paid to related individuals when calculating the credit.

Employers in U.S. territories are eligible to claim ERC if they meet other eligibility requirements. For information about qualified wages paid by employers in U.S. territories, see Notice 2021-20, Section III.A, Question 4.

A3. You don't qualify for the ERC if you didn't operate a business or tax-exempt organization with employees.

Some examples of taxpayers who are not eligible to claim the ERC and are often targeted by ERC scam promoters include:

• Individual taxpayers who are not business owners
• Employees
• Retirees
• Self-employed individuals who do not have employees
• Household employers
• Employers that didn't pay wages to employees during the qualifying time periods
• Employers who experienced supply chain disruptions but did not experience a full or partial suspension of operations by a qualifying order
• Government agencies

Some other limitations or exceptions apply in certain quarters for certain types of employers. See comparison chart.

A4. Participating in the PPP doesn't affect your eligibility. It affects the amount of qualified wages used to calculate the credit.

If your PPP loan was forgiven, you can't claim the ERC on wages that were reported as payroll costs to obtain Paycheck Protection Program loan forgiveness, however, you may still be eligible to claim ERC.

Payroll costs up to the amount that SBA forgave are ineligible for ERC. You may use the rest of your qualified wages to calculate your ERC.

Documents you may need to support your ERC claim may include:

• PPP loan forgiveness application
• Documentation from the Small Business Administration related to your loan forgiveness decision
• Calculations that show you did not claim the ERC on the same wages you reported as payroll costs
• Records that show the wages used as payroll costs for PPP and wages used to claim the ERC

For more information about the definition of payroll costs related to PPP, see Paycheck Protection Program | U.S. Small Business Administration (sba.gov).

For some examples of how to figure out what to exclude from qualified wages as it relates to PPP, see Notice 2021-20, Section III.I, Question 49.

A5. If you received a restaurant revitalization grant or a shuttered venue operators grant, then you can't claim ERC on the wages you included as payroll costs for either grant program in the third or fourth quarter of 2021.

A6. Being an essential business doesn't necessarily mean you're ineligible for ERC. You may be eligible based on the gross receipts test, or if you can show that you experienced a partial suspension of operations due to an order from an appropriate governmental authority.

For an example of an essential business that was still eligible due to a partial suspension of operations, see Notice 2021-20, Section III.D, Question 17, Example 4.

Whether your business is considered essential or non-essential varies by jurisdiction. You should refer to the governmental order affecting the operation of your trade or business to determine if you are essential or non-essential.

A1. Generally, qualified wages must be wages that are subject to Social Security and Medicare taxes. However, they may also include certain health care expenses you pay for your employees.

Not all wages that you pay to employees may be qualified wages for purposes of the ERC. Be wary of anyone who says you can use all wages when calculating your ERC.

Different dollar limits apply and the rules vary by the quarter for which you're claiming the ERC.

The amount of your qualified wages used to calculate your ERC will also depend on certain factors, including:

• The average number of employees you employed in 2019;
• Whether the employees provided services for the wages you paid during the suspension of operations or the quarter in which there was the requisite decline in gross receipts;
• How the related individual rules apply to your situation;
• Whether the wages were used to claim other tax credits; and
• Whether the wages were used as payroll costs for other programs (Paycheck Protection Program, shuttered venue operators grant or restaurant revitalization grant).

These rules changed throughout 2020 and 2021. See comparison chart.

For further discussion, see Notice 2021-20 (Section III.G, Questions 30 through 39), Notice 2021-23 (Section III.E), and Notice 2021-49 (Section III.E. and Section IV.A. through IV.D).

A1. To qualify for ERC, you need to have been subject to a qualifying government order related to COVID-19 that caused a full or partial suspension of your trade or business operations. The government order may be at the local, state or federal level.

Examples of governmental orders:

• An order from the city's mayor stating that all non-essential businesses must close for a specified time period;
• A state's emergency proclamation that residents must shelter in place for a specified period, except for essential workers;
• An order from a local official imposing a curfew on residents that impacted the operating hours of your trade or business for a specified time period;
• An order from a local health department mandating a workplace closure for cleaning and disinfecting.

A2. No. Recommendations or statements encouraging you to take certain actions are not orders.

To qualify for the ERC, you must have been subject to a government order that fully or partially suspended your trade or business.

If you use a third party to calculate or claim your ERC, you should ask them to give you a copy of the government orders – not a generic narrative about an order. Read the order carefully and make sure it applied to your business or organization.

A3. No. You need to demonstrate that the government order was related to COVID-19 and that it resulted in your trade or business being fully or partially suspended. 

A4. Whether your business or organization was fully or partially suspended depends on your specific situation. For examples, see Notice 2021-20, Section III.D.  

Some examples of who doesn't qualify under this eligibility factor:

• If all your employees were able to telework during the pandemic and your business continued to operate, your business wasn't suspended.
• If your customers were affected by a stay-at-home order, but no orders applied to your business operations, you weren't suspended.
• If you voluntarily closed your business or reduced hours of operation, you weren't ordered to suspend.

You could still qualify for ERC based on a decline in gross receipts even if you don't qualify under suspension of operations due to government order.

Remember: You need to be able to prove your claim with a specific government order and show how it suspended all or part of your operations.

A5. IRS will consider you to be partially suspended if more than a nominal part of your business was suspended by a governmental order.

The IRS considers "more than nominal" to be at least 10% of your business based on either the gross receipts from that part of the business or the total hours your employees spent working in that part of the business.

If all parts of your business could operate but you had to modify how it operated, then we will consider you to be partially suspended if you can show that the order had more than a nominal effect on your business. We consider "more than a nominal effect" to be at least a 10% reduction in your ability to provide goods or services in the normal course of your business.

If you changed business practices to alter behavior, such as making store aisles one-way or requiring customers or employees to wear masks, we won't consider that change to have had a more than a nominal effect on your business operations.

For more details and examples, see Notice 2021-20, Section III.D, Questions 11, 17 and 18.

A6: You are considered an eligible employer for the entire calendar quarter if your business operations were fully or partially suspended due to a governmental order during a portion of a calendar quarter.

However, you can claim the ERC only for wages paid during the suspension period, not the whole quarter.

For examples, see Notice 2021-20, Section III.D, Question 22.

A1. A supply chain issue by itself does not qualify you for the ERC.

The IRS provided a narrow, limited exception if an employer was not fully or partially suspended but their supplier was. However, it applied only when the employer absolutely could not operate without the supplier's product and the supplier was fully or partially suspended themselves.

In addition to having the supplier's governmental order, you will need to show that:

• The government order caused the supplier to suspend operations,
• You couldn't obtain the supplier's goods or materials elsewhere (regardless of cost), and
• It caused a full or partial suspension of your own business operations.

You should be wary of anyone who says you qualify for ERC based on supply chain issues without asking for specific information about how your business or organization was affected, your supplier's situation and documentation. For more information and examples see legal memo AM-2023-005PDF.

A1. You may qualify for ERC if your business or organization experienced a significant decline in gross receipts during 2020 or a decline in gross receipts during the first three quarters of 2021.

Generally, this test is met by comparing the gross receipts of the calendar quarter in which ERC is considered to the gross receipts of the same calendar quarter in 2019.

• For 2020, you begin qualifying in the quarter when your gross receipts are less than 50% of the gross receipts for the same quarter in 2019. You no longer qualify in the quarter after the quarter in which your gross receipts are more than 80% of the same quarter in 2019. 
  
  For example: Your gross receipts were $100 in each quarter of 2019. They were $45 in the second quarter of 2020, $85 in the third quarter and $75 in the fourth quarter. Under these facts, you would qualify for the second and third quarter but not the fourth. 
   
• For 2021, the gross receipts for the quarter must be less than 80% of the gross receipts for the same quarter in 2019.
   
• For calendar quarters in 2021, you can also use the alternative quarter election rule, which gives employers the ability to look at the prior calendar quarter and compare to the same calendar quarter in 2019 to determine whether there was a decline in gross receipts.
  
  For example: Your gross receipts were $100 in each quarter of 2019. They were $75 in the first quarter of 2021 and $85 in the second quarter. Under these facts, you would qualify for the first quarter using the regular gross receipts test and for the second quarter using the alternative quarter election rule.

Be sure to keep thorough records and consider whether you need to coordinate with another part of your business, such as if you're part of an aggregated group. For more information about aggregation rules, see Notice 2021-20, Section III.B. 

A2. Gross receipts for purposes of the ERC are defined by reference to existing law. Learn more about the specific rules in Notice 2021-20, Section III.E, Questions 24 and 25.

For an employer other than a tax-exempt organization, gross receipts for ERC purposes generally means gross receipts of the taxable year. It generally includes:

• Total sales (net of returns and allowances)
• All amounts received for services
• Any income from investments
• Any income from incidental or outside sources

For example, gross receipts for an employer that is not a tax-exempt organization may include:

• Interest (including original issue discount and certain tax-exempt interest
• Dividends, rents, royalties and annuities, regardless of whether those amounts are derived in the ordinary course of the taxpayer's trade or business

For an employer that is a tax-exempt organization, gross receipts means the gross amount received by the organization from all sources without reduction for any costs or expenses, including:

• Cost of goods or assets sold
• Cost of operations
• Expenses of earning, raising or collecting such amounts.

For example, gross receipts for an employer that is a tax-exempt organization may include gross sales or receipts from business activities (including business activities unrelated to the purpose for which the organization qualifies for exemption) and the gross amount received:

• As contributions, gifts, grants and similar amounts without reduction for the expenses of raising and collecting such amounts,
• As dues or assessments from members or affiliated organizations without reduction for expenses attributable to the receipt of such amounts,
• From the sale of assets without reduction for cost or other basis and expenses of sale,
• As investment income, such as interest, dividends, rents and royalties.

A1. A recovery startup business is a business or organization that began carrying on a trade or business after February 15, 2020, and had average annual gross receipts of $1 million or less for the three years preceding the quarter for which they are claiming the ERC.

Your business does not need to specifically relate to pandemic relief or recovery efforts to be eligible.

To be eligible as a recovery startup business, you can't be eligible for ERC under the full or partial suspension test or the gross receipts test. A recovery startup business can claim ERC only for the third and fourth quarters of 2021 and may claim a maximum of $50,000 of ERC per quarter.

You should consider whether you need to coordinate with another part of your business, such as if you're part of an aggregated group. For more information about aggregation rules, see Notice 2021-20, Section III.B. and Notice 2021-49, liSection III.D.

A1. Eligible employers that didn't claim the credit when they filed their original employment tax return can claim the credit by filing an amended employment tax return. For example, businesses that file quarterly employment tax returns can file Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for RefundPDF, to claim the credit for prior 2020 and 2021 quarters.

Reminder: If you file Form 941-X to claim the Employee Retention Credit, you must reduce your deduction for wages by the amount of the credit for that same tax period. Therefore, you may need to amend your income tax return (for example, Forms 1040, 1065, 1120, etc.) to reflect that reduced deduction.

A2. Generally, for 2020 tax periods, the deadline is April 15, 2024. For 2021 tax periods, the deadline is April 15, 2025.  

A3. The person who can sign an ERC claim depends on the type of employer you are.

The claim for refund may also be signed by a duly authorized agent of the taxpayer if a valid power of attorney has been filed.

If you used a third-party payer, such as a Professional Employer Organization (PEO), a Certified Professional Employer Organization (CPEO) or a 3504 agent to file your original return, you can't file a claim for refund on your own. You will need to work with them to claim the ERC.

A4. The IRS reminds anyone who improperly claims the ERC that they must pay it back, possibly with penalties and interest.

A business or tax-exempt group could find itself in a much worse cash position if it has to pay back the credit than if the credit was never claimed in the first place.

The IRS will provide more information as it becomes available to help people who want to withdraw a claim or repay an improperly claimed credit.

A5. No. Claims for refund will not be processed if an original employment tax return has not been filed.

A6. No. The IRS will not process ERC claims for refund if the claim for refund is filed after Forms W-2 were due and you did not file Forms W-2.

A7. Yes.

The amount of your ERC reduces the amount that you are allowed to report as wage expense on your income tax return for the tax year in which the qualified wages were paid or incurred.

Generally, most taxpayers claim wage expense as a deduction on their income tax returns. However, for some taxpayers, wage expense is properly capitalized to the basis of a particular asset or as an inventory cost.

You should amend your income tax return to reduce the amount of your original wage expense if that adjustment has not yet been made by:

• reducing the prior wage deduction, or
• reducing the prior amount capitalized (and making any resulting adjustment, such as reducing a depreciation deduction).

A1. Scam promoters use several different tactics to mislead people who have no chance of meeting the requirements for the Employee Retention Credit while charging them excessive fees – often thousands of dollars.

Warning signs of aggressive ERC marketing to watch out for:

• Unsolicited calls or advertisements mentioning an "easy application process," or offering a short eligibility checklist.
• Statements that the promoter or company can determine ERC eligibility within minutes.
• Large upfront fees to claim the credit.
• Fees based on a percentage of the refund amount of Employee Retention Credit claimed. This is a similar warning sign for average taxpayers, who should always avoid a tax preparer basing their fee on the size of the refund.
• Preparers refusing to sign the ERC return being filed by the business, exposing just the taxpayer claiming the credit to risk.
• Aggressive claims from the promoter that the business receiving the solicitation qualifies before any discussion of the group's tax situation. In reality, the Employee Retention Credit is a complex credit that requires careful review before applying.
• The IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.

Unscrupulous promoters may lie about eligibility requirements, including refusing to provide detailed documents supporting their computations of the ERC. In addition, those using these companies could be at risk of someone using the credit as a ploy to steal the taxpayer's identity or take a cut of the taxpayer's improperly claimed credit.

The IRS continues to see a variety of ways that promoters can lure businesses, tax-exempt groups and others into applying for the credit.

• Aggressive marketing. This can be seen in countless places, including radio, television and online as well as phone calls and text messages.
• Direct mailing. Some ERC mills are sending out fake letters to taxpayers from the non-existent groups like the "Department of Employee Retention Credit." These letters can be made to look like official IRS correspondence or an official government mailing with language urging immediate action.
• Leaving out key details. Third-party promoters of the ERC often don't accurately explain eligibility requirements or how the credit is computed. They may make broad arguments suggesting that all employers are eligible without evaluating an employer's individual circumstances. For example:
  • Only recovery startup businesses are eligible for the ERC in the fourth quarter of 2021, but promoters fail to explain this limit.
  • Promoters may not inform taxpayers that they need to reduce wage deductions claimed on their business' federal income tax return by the amount of the Employee Retention Credit. This causes a domino effect of tax problems for the business.
  • Many of these promoters don't tell employers that they can't claim the ERC on wages that were reported as payroll costs to obtain Paycheck Protection Program loan forgiveness.

A2. The IRS reminds businesses, tax-exempt groups and others being approached by these promoters that they can take simple steps to protect themselves from making an improper Employee Retention Credit claim.

• Work with a trusted tax professional if you're an eligible employer who needs help claiming the credit; the IRS urges people not to rely on the advice of those soliciting these credits. Promoters who are marketing this ultimately have a vested interest in making money; in many cases they are not looking out for the best interests of those applying.

• Request a detailed worksheet explaining ERC eligibility and the computations used to determine the ERC amount.

• Don’t accept a generic document about a government order from a third party. If they say you qualify for ERC based on a government order, ask for a copy of the government order. Review it carefully to make sure it applied to your business or organization.
• Don't apply for this credit unless you believe you are legitimately qualified.     

For more information on warning signs of ERC scams and how to report fraud, see the Employee Retention Credit page.

A3. The IRS encourages people to report:

• Tax-related illegal activities relating to ERC claims
• Individuals who promote improper and abusive tax schemes
• Tax return preparers who deliberately prepare improper returns

To report tax-related illegal activities relating to ERC claims, take these steps:

1. Complete Form 14242, Report Suspected Abusive Tax Promotions or PreparersPDF 
2. Include with your form any supporting materials
3. Provide your contact information: This is optional but will be helpful if we have questions and will let us acknowledge receipt of your referral.
4. Send your form and materials by fax or U.S. mail to the IRS Lead Development Center in the Office of Promoter Investigations

IRS Lead Development Center in the Office of Promoter Investigations

Mail:

Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, CA 92677-3405

Fax:

877-477-9135

A1. In general, you need to have the records you relied on to show:

• Your business operations were suspended, including the specific government order;
• You experienced the required decline in gross receipts;
• Which employees received qualified wages and in what amounts;
•  you paid qualified wages only to employees who were not providing services, if you are a large eligible employer;
• How you allocated qualified health plan expenses;
• How Paycheck Protection Program loan forgiveness affects your ERC claim (see question regarding PPP in the Eligibility section);

Your relationship to other businesses or entities and how it affects your ERC claim (see aggregation rules in Notice 2021-20, Section III.B);

You also need any completed Forms 7200 that you submitted to the IRS and any completed federal employment and income tax returns related to your claim for ERC.

A1. We understand the importance of these credits, and we appreciate the patience of employers and tax professionals as we continue to get valid claims processed – while also protecting against fraud.

Processing of returns that involve the Employee Retention Credit (ERC) has slowed due to the complexity of the amended returns and the increase in aggressive and misleading marketing campaigns luring taxpayers into claiming the ERC when they are not eligible for it. There are very specific eligibility requirements for claiming the ERC, so all claims must be reviewed by an IRS employee. We apologize for the delay.

For the most current information about processing, see IRS Operations: Status of Mission Critical Functions.