Matter & Substance
  August 24, 2021

10 Myths of the Employee Retention Credit

The Employee Retention Credit was part of the CARES Act designed to encourage businesses to retain employees. The credit is fully refundable against payroll taxes for those businesses "significantly impacted by COVID-19." 

Previously there were several limitations based on the number of full-time equivalent employees, receipt of a PPP loan, and other restrictions. However, Congress expanded eligibility and extended the program – both for 2021 and retroactively to 2020 in some cases.

We are working to reach out to any potentially eligible clients to ensure you take full advantage of this credit. Today, we will explore some of the most common misunderstandings preventing businesses from maximizing their credit – courtesy of a recent Insight article published by the Illinois CPA Society.


1. I cannot claim the ERC if I have already claimed Paycheck Protection Program (PPP) funds or gotten my PPP loans forgiven. 

Now you can claim both! Congress removed many limitations in the Consolidated Appropriations Act (CAA) of 2021. PPP funds will only account for 2.5 times your monthly payroll expenses and is meant to be spread out over six months. This potentially leaves plenty of uncovered wage expenses for claiming the ERC.

2. My business didn’t have a drop in gross receipts of 50 percent or more.

The CAA reduced this qualification to a drop of 20 percent or more for 2021. Also remember you may qualify for the ERC if you were subject to a partial or full suspension due to a government order.

3. My business wasn’t shut down during the pandemic.

Even a partial suspension order by the government (federal, state, or local) of your business could potentially qualify. For example, here are a few events that may qualify:

  • Partial shutdown
  • Disruption in business
  • Inability to access equipment
  • Limited capacity
  • Shutdowns of supply chain or vendors
  • Reduction in services offered
  • Reduction in hours to accommodate sanitation
  • Shutdowns of some locations and not others
  • Shutdowns of some members of a business

The key question is:
Due to a government-ordered suspension is/was your business unable to continue activities in a comparable manner, and did that result in a more than nominal impact on your business operations?

And remember, the partial or full suspension is an alternative way to qualify for the ERC that is separate from the reduction in gross receipts test.

4. My company was deemed an essential business, so I cannot qualify due to business suspension.

Even if your business is deemed essential, an impact to or change in business may still qualify you. For example, if you remained open but your vendors were closed or you could not travel to a client’s job site, you may still qualify. Alternatively, if part of your business was considered non-essential and was impacted by a government-ordered suspension, you may also qualify.

5. My company has grown during the pandemic, so this is not something I should take.

Great news! If your company has grown during the pandemic, but experienced a full or partial suspension, there are still expenses that may qualify for the ERC.

6. Sales have rebounded in the first quarter of 2021, so I do not qualify for this credit.

For credits claimed in 2021, the CAA allows you to look at one quarter prior to determine qualification. This means you can still potentially determine eligibility based on lost revenue in 2020. And remember, you may still qualify if your business was subject to a full or partial suspension.

7. I was generating losses, or I do not have any tax liability.

This ERC is a refundable credit, meaning any credit above tax liability is sent to you as a refund.

8. My company has grown to more than 500 employees, so I am not eligible for the ERC.

The employee count restriction is based on full-time equivalent (FTE) employees, which is a more involved calculation than just counting everyone on payroll. Further, if you paid any employees to not work, or to work fewer hours for which they were paid, then the employee count restriction may not apply to those employees.

9. My organization is a charity and the ERC is only for businesses.

The ERC also may provide significant benefit to charities—churches, nonprofit hospitals, museums, etc. Charities can be particularly good candidates for the ERC.

10. The IRS is too busy to properly check documents.

While you may qualify, applying for the credit is another process. It would be nice to check a few boxes, give a few sentences of explanation, and expect the IRS to hand over thousands of dollars, however this is not the case. The best practice is for businesses to provide contemporaneous documentation from counsel that will properly and fully document how they qualify for the ERC.

Do not leave anything on the table – we are helping more clients take full advantage of the ERC every day, and we can help you, too!

To find out if you qualify, take our brief survey and your M&S Tax Advisor will reach out once we have reviewed your submission.