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History of the Employee Retention Credit

Posted by Jonathan Ciccotelli on Sep 16, 2021 9:00:00 AM

Smilling young business woman in front her team blured in background. Group of young business people. Modern bright  startup office interior.

The Employee Retention Credit (ERC) was first introduced in March of 2020 to incentivize employers to keep their workers during the pandemic. Employers are eligible to receive the credit through the end of 2021 (unless new legislation ends it earlier).

To get a better understanding of how the ERC works today, let’s review how it has changed over time.

March 27, 2020

Coronavirus Aid, Relief, and Economic Security Act (CARES Act)

In response to the COVID-19 pandemic the CARES Act was passed on March 27, 2020 creating the ERC.

    • The credit was calculated on eligible wages paid between March 12, 2020 and December 31, 2020.
    • The credit was 50% of up to $10,000 of qualified wages per employee.
    • The credit was available if:
      • The business had an initial 50% or more reduction in gross receipts against the same quarter from 2019 and maintained a 20% or more reduction in subsequent quarters, or
      • The business’s operations were fully or partially suspended due to a government order.
    • Employers with more than 100 full-time employees were “large employers”. Large employers most significant limitation was they could only use wages paid to employees to not work (not all qualified wages).
    • The ERC was not available to recipients of Paycheck Protection Program (PPP) funds.
    • The ERC could not be calculated using wages that were used to qualify for paid family and medical leave credits or for the Work Opportunity Tax Credit (WOTC).

December 27, 2020

Consolidated Appropriations Act (CAA) 

The CAA made a few major changes to the ERC. Some of the changes were retroactive, but most applied beginning January 1, 2021.

    • The credit was extended through June 30, 2021.
    • In 2021, the credit became worth 70% of up to $10,000 of qualified wages per employee per quarter instead of annually.
    • The gross receipts test changed in two ways for 2021: (1) businesses needed a 20% reduction in gross receipts (compared to 50%), and (2) the assessment could be made using the current quarter compared to the same quarter from 2019 or using the immediately preceding quarter compared to the same quarter from 2019.
    • The definition of “large employer” was changed to those with more than 500 full-time employees.
    • The CAA allowed most PPP loan participants to claim the ERC using wages they did not use for PPP forgiveness.

March 1, 2021 and April 2, 2021

IRS Notice 2021-20 and IRS Notice 2021-23

These notices formalized Frequently Asked Questions previously published to the IRS website and also provided guidance for CAA updates to the credit. These notices clarified questions, including:

    • What constitutes a partial shutdown of a business? 
    • How excess wages used for PPP forgiveness are treated for ERC purposes.
    • Are health plan expenses considered qualified wages?
    • Clarified the election to use the preceding quarter comparison to qualify.

March 11, 2021

American Rescue Plan Act of 2021 (ARPA)

The ARPA modifications made to the credit were effective July 1, 2021. 

    • The ERC was extended through December 31, 2021.
    • Certain startup businesses – those that started after February 15, 2020 and that had an average of $1 million or less in gross receipts,– could be eligible for a quarterly credit of up to $50,000 beginning in July 2021 (maximum $100,000 total).
    • Severely financially distressed employers (SFDEs) are defined as businesses whose gross receipts fall at least 90%. Beginning in July 2021, SFDEs are not bound by the “large employer” limitations.

August 4, 2021

IRS Notice 2021-49

This notice takes the form of a FAQ document. It answers some of the following questions:

    • What is the definition of a full-time employee vs. a full-time equivalent?
    • Are owner and owner’s spouse wages eligible for the ERC?
    • Should a taxpayer who already filed their tax return amend their return if they want to use wages toward the ERC instead?

August 10, 2021

IRS Revenue Procedure 2021-33

This introduces a safe harbor that allows employers to exclude forgiven PPP loans from gross receipts when determining eligibility.

The IRS may release more guidance about the ERC before the year is out. 

In the meantime, we encourage you to review the following table.

Tax Law Implications to the Employee Retention Credit





Eligibility Dates

March 12, 2020 – December 31, 2020

January 1, 2021 –
June 30, 2021

July 1, 2021 – December 31, 2020

Credit Calculation

50% of up to $10,000 of wages per year

70% of up to $10,000 of wages per quarter

70% of up to $10,000 of wages per quarter

Maximum Credit

$5,000 per year

$7,000 per quarter

$7,000 per quarter

Maximum Credit for Startup Businesses 



Up to $50,000 per quarter beginning July 1, 2021

Reduction in Gross Receipts Needed to Qualify

50% initially, 20% after 50% threshold met



Comparable Quarters for Gross Receipts Calculation

Comparable quarter in 2019

Comparable quarter in 2019 or immediately preceding quarter compared to same quarter in 2019

Comparable quarter in 2019 or immediately preceding quarter compared to same quarter in 2019

Large Employer Definition

100 or fewer FTE

500 or fewer FTE

500 or fewer FTE


This article was featured in Crain's Cleveland Business on September 11, 2021.

Topics: Tax Planning & Strategies, Accounting & Auditing, Accounting and Tax Resource, COVID-19

Jonathan Ciccotelli

Jonathan Ciccotelli

Jonathan Ciccotelli is the Partner-In-Charge of Meaden & Moore’s Tax Services Group. For over 29 years, Jonathan has worked closely with private and public companies in manufacturing, transportation, distribution, construction, and retail under a variety of business structures, including S-corporations, C-corporations, consolidated groups, and limited liability companies. He enjoys running, cycling, and cheering on his kids at sporting events.

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