Chapter 03

How to Apply for the Employee Retention Credit

The confusing part about the ERC doesn’t just end if you’re eligible but also when it comes to actually applying.

And it gets even more complicated since the 2020 and 2021 requirements differ quite wildly, especially when it comes to what defines a small and large business.

The answer to your problem is this walkthrough guide on how to apply for the employee retention credit.

Can I still apply for ERC? 

As of 2023, you can still apply for the ERC. Granted, the ERC applies to affected businesses in 2019-2021, but you can still claim the tax credit up until the final deadline, which may be as late as 2024 or 2025, depending on your individual circumstances. 

How to apply for employee retention credit in 4 steps

Work your way through the steps below on how to apply for the employee retention credit:

1. Evaluate your eligibility based on size 

Your business’ size will determine how much and how easily you may be able to account for qualified wages.

In addition, the year that you’re claiming for has an impact, but let’s break this down.

Claiming for 2020

For employers claiming ERC for the calendar year 2020, the size of your business had to be less than 100 full-time employees through 2019 for you to include all wages as “qualified wages.”

Larger employers (with more than 100 full-time employees) in 2020, by contrast, can only count wages paid for not providing services. 

Claiming for 2021

However, for 2021, the threshold expands by a few hundred.

Instead of having a threshold of 100 full-time employees to be deemed  a “small” business, the 2021 ERC threshold is 500 full-time employees.

Thus, more businesses are eligible for the ERC on wages paid to employees whether they worked or not in 2021, compared to in 2020.

2. Evaluate your suspension of operation 

The next step you need to take is to ensure you evaluate your suspension of operations, but the criteria for this differs between 2020 and 2021.

Suspension of operations for 2020

For 2020, you must demonstrate the following:

During the year that you apply for the ERC, your business experienced either a full or partial shutdown of operation due to a governmental order that severely impacted the business’ ability to travel, participate in commerce, or attend group meetings due to COVID. 

Alternatively, if the aforementioned element cannot be satisfied, a showing of a significant economic decline, at least by 50% compared to the year before, will be deemed acceptable.

Updated suspension requirements for 2021

In the fiscal year 2021, the IRS updated the requirements for demonstrating a significant economic decline:

Instead of needing only show a 50% year over year decline, the updated requirements include a decline in gross receipts in one of the first three quarters in 2021 and a showing that those gross receipts were less than 80% of the receipts during the same calendar quarter in 2019. 

In other words, both the 2020 and 2021 requirements compare the economic decline to what the business was experiencing in 2019, which was the last year pre-COVID. 

3. Calculate your qualified wages

Now that you’ve addressed your eligibility, you need to calculate qualified wages to see if filing for the ERC makes sense for your specific circumstances. 

The ERC calculation takes a few elements into consideration and, again, depends on the year that you decide to use the ERC and the size of your business.

You'll find more on this in our walkthrough of how to calculate the employee retention credit

Analyzing the year you’re claiming for

For 2020:

The ERC will equal 50% of the qualified wages with a max out value of $5,000 per employee in a given calendar quarter.

For 2021:

The percentage rises from 50% to 70% of qualified wages. This means that companies could receive a maximum value of $21,000 per employee.

Combining both years can provide a total benefit of $26,000 per employee.

Analyzing your business’ size

It’s important to ensure that the qualified wages or compensation paid by the employer is accurate, particularly in terms of the business’s size.

Depending on the business size, the definition of qualified wages changes. 

Small business

If your business falls under the small business category, qualified wages refer to all wages paid to any employee during the period of time in which business operations were halted due to COVID-19 or governmental order.

These wages include:

  • Cash or hourly wages

  • Vacation time

  • Salaries

  • Taxable wages, generally

Large business

In contrast, if your business falls under the large business category, then qualified wages will mean something completely different in that it will only refer to wages given to an employee for time the employee was not performing services due to COVID-19 or a governmental order. 

In other words, these are wages paid to individuals that your business may have hired or retained before the COVID shutdown but who could not work at their planned start date or thereafter due to the shutdown. 

4. File and claim your refundable tax credit using Form 941

After calculating your qualified wages and seeing how much credit you can take back from your taxes in the fiscal year, the next step is an easy, but incredibly important, step: filing your Form 941.

The most relevant information that the IRS looks at on the Form 941 are the federal withholdings from employees, which include:

  • Wages

  • Employee tips

  • Federal income tax withholdings

  • Employer/employee social security

  • Medicare taxes

  • Medicare tax withholdings

  • Quarterly adjustments to SS or Medicare taxes 

  • Sick pay

Once all of the information is filled out on the form, you’ll want to file by mail or electronically. The latter option is far more convenient, as the federal e-File system is now up and running. 

This is especially useful if you’re in a time crunch and want to be able to file from the comfort of your own home.

Lastly, be sure to keep up to date on the Form 941 due dates. In particular, Form 941 must be filed one month after the last day of the reporting period.

See the chart below for a clearer picture of what these dates look like:



Due Date

January 1 to March 31

First Quarter

April 30

April 1 to June 30

Second Quarter

July 31

July 1 to September 30

Third Quarter

October 31

October 1 to December 31

Fourth Quarter

January 31


As you can see from the table above, the deadline for filing Form 941 depends on which quarter you’re applying the ERC to.

Please keep in mind that if the deadline happens to fall on a weekend or on a holiday, the deadline will be extended to the following work day. For example, if it’s a Saturday, then the deadline will be adjusted to the next Monday. 

Also, claim your refund on the following fiscal year’s income tax return. The effects of the ERC are immediate because you’re basically claiming the credit as soon as you file Form 941. 

However, in terms of actually receiving the tax return, the timing may vary depending on when you filed as well as how big your business is.

At time of writing this guide, the IRS is experiencing a significant backlog of 941 returns, as well as revised 941 returns for those filing past the deadline or for those who made mistakes on their original filings and are seeking amendment.

Currently, the number of forms is estimated to be around 2.4 million, with as many as 400,000 unresolved Forms 941s from 2021 alone. Some sources claim that even as of April 2023, the backlog of forms that have not even been touched is close to 1 million

Therefore, receiving a refund after filing your Form 941 can range anywhere between 6 and 16 months.

Need To Discuss Your Situation In Detail? Give Us A Call

The employee retention credit application: a working example

Let’s start looking at the employee retention credit 2023 application with an example of a small business, perhaps a family-owned pizza restaurant called “Michael’s Pizza” (Michael’s, for short).

1. Is the restaurant the right size for the ERC?

The first prong of the analysis for Michael’s is the size of the restaurant. How big is his business’s operations in terms of the number of full-time employees?

As mentioned above, note the thresholds for each year:

  • 2020: 100 full-time employees

  • 2021: 500 full-time employees.

Large Business Example 

For the sake of this example, let’s imagine it’s 2020 and Michael’s employs 101 full-time employees.

This would make Michael’s a larger business; one which cannot claim all wages as qualified wages under the ERC. 

Small Business Example

Now, let’s adjust the timeframe and say that Michael’s applied for ERC during the fiscal year 2021.

During this year, the IRS changed the ERC definitions of small and large businesses by increasing the number of full-time employees necessary for a business to fall under the large business category–500 full-time employees. 

Therefore, Michael’s, with 101 full-time employees, is considered a small business and can claim all wages as qualified wages under the ERC. 

2. Was the business operation significantly suspended? 

Next, Michael’s must be able to demonstrate that the business experienced a complete or partial shutdown as a result of the COVID-19 pandemic.

The easiest way to prove this case is to show a shutdown or partial suspension was due to a governmental order that came into effect. 

If there was indeed such an order that caused the shutdown, such as government-issued guidance on social distancing or temporarily banning on-site dining, Michael’s could easily show that the order had more than a nominal effect on its operations in that it suspended wholly or partially its pizza practice.

To show that business operations were more than nominally impacted, Michael’s can demonstrate some of the following to explain that its operations were more than nominally impacted by the governmental order:

The work could not be done remotely

The pizza operations could not be conducted remotely because they needed to be cooked properly in an oven and kitchen.

Operations that could be done remotely required significant modification and costs

HR, corporate employees and other non-sales employees could work remotely but needed equipment, software, and other assets that the restaurant did not have on hand at the time of the shutdown.

Social distancing modifications required significant changes in operations

Only 3 employees, instead of 10, could work within the kitchen and/or cash register area at a time, drastically limiting the number of shifts worked, as well as the number of customers the restaurant could serve at a time.

Governmental orders greatly impacted the business’s revenue

Since social distancing allowed for only a few employees to work at a time and diminished the restaurant’s capacity to serve customers who usually dined in-person, its total gross receipts decreased 50% (or more). 

It’s important to note that the “significant impact” test is highly subjective and that the IRS will consider a myriad of factors in determining whether the suspension of operation had more than a nominal impact on the business’s function.

3. How much qualified wages could you claim within the quarter? 

As explained in the previous section about large and small businesses, the size and the year will determine how much qualified wages Michael’s will be able to file for in the ERC loan application. 

For the sake of this example, let’s run through an analysis of both, assuming that each employee is paid $50,000 per annum. 

Large business

If Michael’s falls under the large business example (i.e. 101 full-time employees in 2020) then the qualified wages would be limited only to wages paid to employees who did not work as a result of the governmental order for the suspension of business operations. 

In this example, let’s say 5 new employees were hired at the end of 2019 and were slated to begin work in 2020 but could not start due to COVID shutdowns.

Additionally, let’s say, due to the restrictions, 20 employees (out of the 101) were also unable to work their regular shifts at all.

This means that those 25 employees’ wages, including salaries, vacations, cash wages, etc., are deemed qualified wages. In 2020, up to 50% of $10,000 in employee wages were covered. 

These 25 employees are covered, meaning that 50% of the first $10,000 in wages per employee each quarter of 2020 can be tax credited. 

Small business

Now, let’s imagine Michael’s files for ERC in 2021 instead of in 2020.

In this case, Michael’s would be considered a small business, meaning that all 101 employees that worked full-time for Michael’s can have their wages fall under the qualified wages category. 

Additionally, in 2021, the qualified wages can cover up to 70% of $10,000 in employee wages and health plan costs. This is a 20% increase from 2020, allowing for a total of $7,000 per employee per quarter and $28,000 per employee annually. 

4. What information do you need to put on Form 941 about your restaurant?

Now it’s time to fill out Form 941 so that you can claim your ERC and receive the tax refund. 

Basic information first

First, the basic information must be filled out:

  • Number of full-time employees

  • Their respective salaries 

The first answer is easy. In this case, we know that Michael’s has 101 employees.

Second, the wages come out to $50,000 per employee. However, this definitely isn’t the extent of the information, especially since the jobs are in the food services industry. 

Naturally, the second line of wages that comes to mind after salary is tips and other compensation. 

Luckily, tips can be included for ERC credit. However, the caveat is that tips may only be included as qualified wages for the ERC if they exceed $20 in a given calendar month. 

Additionally, according to the IRS, tips need not solely be in cash, as electronic payment of tips also counts.

Now add federal withholdings from employees

Lastly, the most relevant information that the IRS looks at on Form 941 are the federal withholdings from employees, which include:

  • Wages

  • Employee tips

  • Federal income tax withholdings

  • Employer/employee social security

  • Medicare taxes

  • Medicare tax withholdings

  • Quarterly adjustments to SS or Medicare taxes

  • Sick pay

Enter the federal income tax you withheld (or were required to withhold) from your employees on the quarter's wages, including qualified sick leave.

5. File Form 941 

Last, but certainly not least, it’s time to file the Form 941.

While this step may seem easy enough, there are a few key details to keep in mind, including the deadline for filing depending on the applicable quarter and the method of filing (electronic or paper).

Depending on which time of year Michael’s decides it would like to file its employment tax forms, and which quarter it wishes to use the ERC, the deadline will vary.

Considering it’s still the month of April, the two deadlines that come to mind are April 30th and July 31st, which are the deadlines for the first and second quarters, respectively. 



Due Date

January 1 to March 31

First Quarter

April 30

April 1 to June 30

Second Quarter

July 31


If Michael’s decides to file by July 31st, it should have a comfortable amount of time and can do so by paper, if it prefers.

However, since the April 30th deadline is a lot tighter, filing electronically would be the recommended route.

To file electronically, employers must have access to IRS-approved software, also known as approved IRS Modernized e-File (MeF) Business Providers software. 

Still Need Assistance? Give Us A Call

4 Tips for when you apply for ERC

Combined with the guidance we’ve already given you, keep these tips in mind for when you apply for the ERC:

1. Maximum credit varies by year

The amount of credit you receive through the ERC will vary depending on which year (2020 or 2021) you decide to file for your Form 941.

For 2020, the maximum eligible wage per employee per quarter is $5,000 in payroll tax credits, while for 2021 the maximum is $7,000. 

2. Form 941X is an amendment

Note that since you’re filing information on Form 941 retroactively, you must file via Form 941-X Adjusted Employer’s Quarterly Federal Tax Return.

The “X” version of the form is necessary, being used to amend information that was filled out on the original employee retention credit form Form 941.

3. ERC covers wages of all types of employees:

While the ERC evaluates the size of businesses based on full-time employees, this doesn’t mean that the credit is limited to the wages of only full-time employees.

In fact, the ERC can be used to cover wages of seasonal employees and part-time employees during each credit-generating period. 

4. Timing is key

The time it takes to receive the refund after filing Form 941 amendment varies. As of late, the approximate timeline is 9 months to receive the refund, so be sure to keep this in mind when filing, especially if you’re basing any financial decisions upon receiving the tax return.

Unsure How This Applies To You? Give Us A Call!

ERC application challenges: things to look out for

Again, the ERC has many benefits but there are certainly ERC application challenges, drawbacks and other shortcomings to keep in mind:

1. Qualifications for other federal loans may be impacted 

While it’s true that applying for the ERC may not impact a business’s eligibility for other types of federal loans, such as the PPP loan, EIDL, Restaurant Grant, or other COVID-19 relief programs, that doesn’t necessarily mean that it does not impact other programs’ usefulness to the business.

For example, if Michael’s uses the ERC on its employees' qualified wages, it may not then use other federal relief programs to pay for the same wages that were covered by the ERC, such as the PPP loan.

Still, this may provide some greater relief for larger businesses that may have more employee wages to pay that don’t all fall under the qualified wages category.

(Read through our employee retention credit and PPP guide if you're looking to claim for both!)

2. Duration of availability for the ERC

The ERC’s applicability is still limited to 2020 and 2021. The official timeline for when a business must have experienced either a significant decline or shutdown due to COVID is from March 13, 2020 to December 31, 2021. 

However, for the last quarter of 2021, only a limited number of businesses that fall under the “recovery startup” category are eligible for the ERC. 

Therefore, if timing of the availability for these funds is an issue for your business, and if the timetable of business suspension or decline does not match up with 2020 to 2021, then the ERC may not be as effective of a resource as other relief programs. 

3. Proving that your business experienced significant decline 

Finally, the requirements for showing that the business experienced significant decline isn’t just very difficult to prove but is also highly subjective and based upon the judgment of the IRS officers reviewing the applications. 

A simple showing of a government shutdown or order is not enough. Even showing that a business had to enact substantial changes to their operations isn’t enough. 

The evidence that the IRS requires must show that the suspension or modification resulted in a significant reduction in the employer’s ability to provide its services in its normal course of business and/or that the business experienced a significant decline in revenue as a result. 

Moreover, it must show that alternative telework options were either unavailable or incompatible with the type of work that the business conducted. 

A perfect example of a way to show this would be in our example above of Michael’s, which could not possibly cook pizzas remotely through a computer.

Can I apply for the ERC myself?

Yes, you can apply for the ERC yourself if you’re confident in understanding if your business is small or large based on the number of employees, how the 2020 requirements compare to 2021’s, how to work out a substantive decline in operations, calculating qualified wages and completing Form 941.

If you’re in any doubt as to whether you qualify or if you need support with anything to do with the ERC, you should get in touch with the team here at Brotman Law so we can discuss your specific circumstances more closely.

Give Us A Call

Key takeaways on how to apply for the ERC tax credit

The ERC rules for who is eligible and also how much they qualify for can be difficult to interpret without the help of a professional.

However, with due diligence and careful reading, knowing how to apply for the ERC tax credit and obtaining its benefits can be a significant help for businesses, large and small, impacted during the 2020 and 2021 fiscal years.

Want To Learn More About The ERC?

Visit Our Resource Page


Want To Save This Guide For Later?

No problem! Just enter your email address and we'll send you the PDF of this guide for free.

New call-to-action
Schedule a Tax Action Plan Today!