Employee Retention Credits (ERCs)

Legislature update: Congress recently passed a bill that ends Employee Retention credits, starting Oct 1, 2021. If your company qualifies for ERC as a Recovery Startup Business, special rules apply, but Gusto won’t be able to help you claim them at this time.

You can work with our partner Clarus (more info at the bottom of this article) or your CPA to continue claiming credits in Q4 2021.

The Employee Retention Credit (ERC) allows companies to save on payroll taxes for eligible employee wages. Learn more on our blog.

If your company was negatively impacted by COVID-19 and your payroll wages are eligible, you may be able to set up ERCs to accrue through Gusto. We’ll claim the credits on your quarterly taxes and the IRS will refund you directly. 

Need help along the way?

If you’re unsure or having trouble answering any of the questions, you have a couple of options:

Step one: check if you’re eligible to claim the credits in Gusto

Based on your answers to the questions, we’ll let you know if you qualify to claim ERC credits in Gusto.

  1. Go to the COVID-19 section of your Gusto account.

  2. Scroll to the “Claim the employee retention tax credit” tile and click Claim credit.

  3. Click Let’s get started. 

  4. Tell us about your company history—when was your company started?

    • Eligibility rules vary depending on when your company was started. 

    • If your company started after Feb 15, 2020, special rules apply—you may be eligible for ERCs, but Gusto won’t be able to help you claim them at this time.

  5. Click Save and continue.

  6. Choose whether your company is, or is not a seasonal business.

    • Seasonal businesses are businesses that don’t owe taxes in a particular quarter because they didn’t pay any wages that quarter due to the seasonality of their business (for instance, Halloween costume stores, water park, tax preparation service, etc.).

    • If you have a seasonal business, special rules apply. You may be eligible to claim ERCs, but Gusto won’t be able to help you claim them at this time.

  7. Let us know if you’ve already claimed any employee retention credits outside of Gusto.

    • If yes: you’ll need to amend your own filings with the IRS for the quarters you claimed ERCs outside of Gusto. The filings we’ve done on your behalf are incomplete since we didn’t report those credits. 

    • We can help with any unclaimed credits, but we can’t import information about credits you’ve already claimed.

  8. Click Save and continue.

    • If you answered yes to the previous question, we’ll ask you a few more detailed questions: 

      • Do you want to use Gusto to claim additional ERCs?

      • Did you claim any ERCs in 2020?

      • Did you claim any ERCs in 2021?

  9. Let us know if any of the employees that were paid were family members, employees with more than 50% ownership in the business, or people you’ve already claimed WOTC credits for. 

    • Some employee wages don’t qualify for ERCs. These special categories of employees include:

      • Family members of owners with more than 50% ownership in the business, including:

        • A child or grandchild;

        • A brother, sister, stepbrother, or stepsister;

        • The father or mother, or an ancestor of either;

        • A stepfather or stepmother;

        • A niece or nephew;

        • An aunt or uncle;

        • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

      • Owners that own more than 50% of the company

      • Employees that the company has claimed Work Opportunity Tax Credits (WOTC) for.

  10. Click Save and continue.

  11. In 2020, which quarters experienced losses of at least 50% relative to the same quarter in 2019? 

    • You can find historical gross receipts on Form 1120 that you filed with the IRS for previous quarters.

    • In 2020, your company is eligible to start claiming ERCs in the first quarter it experienced gross receipt losses of at least 50% compared to the same quarter in 2019. 

      • For example, if your company had gross receipts of $1000 in Q2 2019, then made $500 or less in Q2 2020, it would be eligible to start claiming ERCs on wages paid starting Q2 2020.

      • Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses. Learn more from the IRS.

  12. Click Save and continue.

  13. Did gross receipts in any of the listed quarters recover at least 80% relative to the same quarter in 2019?

    • A company stops being eligible to claim ERCs once gross receipt losses recover to 80%. 

      • For example, if your company had gross receipts of $1000 in Q3 2019, then made $800 or more in Q3 2020, it would no longer be eligible to claim ERCs in the following quarter (Q4 2020).

      • Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses. Learn more from the IRS.

  14. In 2021, which quarters experienced losses of at least 20% relative to the same quarter in 2019?

    • The rules for claiming credits for 2021 are different from those for 2020. 

    • In 2021, your company is eligible to start claiming ERCs in the first quarter it experienced gross receipt losses of at least 20% in a quarter compared to the same quarter in 2019.

      • For example, if your company had gross receipts of $1000 in Q2 2019, then made $800 or less in Q2 2021, it would be eligible to start claiming ERCs on wages paid in Q2 2021.

      • Gross receipts are the total amounts the organization received from all sources during its annual accounting period, without subtracting any costs or expenses. Learn more from the IRS.

  15. Were your operations fully or partially suspended by the government?

    • Companies that were fully or partially suspended by the government due to COVID-19 may be eligible to accrue ERCs.

  16. Did your company start a new trade or business after Feb 15, 2020?

    • If your company started a new trade or business after Feb 15, 2020, special rules apply. You may be eligible for ERCs, but Gusto won’t be able to help you claim them at this time.

Step two: determine next steps based on your qualification status

Step three: if qualified, set up the credit accrual in Gusto

  1. On the “Determine employee eligibility” page, tell us which employees fall under unique special categories so we can make sure we’re accruing your ERCs correctly. If none of your employees fall into the categories below, we’ll accrue ERCs for all employees on the payroll. Special categories include:

    • Family members of a company owner with more than 50% ownership

      • A child or grandchild;

      • A brother, sister, stepbrother, or stepsister;

      • The father or mother, or an ancestor of either;

      • A stepfather or stepmother;

      • A niece or nephew;

      • An aunt or uncle;

      • A son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law

    • Employees with more than 50% ownership in the business

    • Employee’s you’ve already claimed WOTC for

  2. Click Save and continue.

  3. Let us know which past quarters have payrolls you’d like to accrue ERCs for.

    • In the pages that follow, you’ll choose individual payrolls if you don’t want to accrue for the whole quarter. 

    • Only eligible quarters are shown here—if this looks incorrect you can update quarter eligibility after you finished the setup.

  4. Let us know which current and future quarters you’d like to accrue ERCs during.

    • Each quarter will need to meet the gross receipts requirements to be eligible. We’ll ask you to confirm your eligibility at the end of the quarter before we file. 

  5. Did the company receive any Paycheck Protection Program (PPP) funding?

    • You can’t claim ERCs for wages paid with a PPP loan that has been, or you expect to be partially or fully forgiven. 

  6. Click Save and continue. 

  7. Confirming eligible payrolls—mark which payrolls were funded by forgiven PPP funds (completely or partially). Those payrolls will not accrue ERCs.

    • Click the dropdowns next to the quarter and year (QX 20XX) to repeat this process for each eligible quarter.

  8. Click Save and finish setup. 

Step four: manage your ERC settings

Once you’ve setup ERCs to accrue, you can manage accrual settings, including:

Review or update your PPP history 

  1. Head to the COVID-19 section.

  2. Click the Employee retention credit tile. 

  3. Under the “Accrual Settings” headline, next to “Paycheck Protection Program (PPP) history”, click Edit.

  4. Edit the answers to the questions as needed and click Save.

Review or update your employee eligibility 

  1. Head to the COVID-19 section.

  2. Click the Employee retention credit tile. 

  3. Under the “Accrual Settings” headline, under “Employee eligibility”, click the dropdown arrow next to the eligible employee count.

  4. Click edit next to the employee’s name whose eligibility you’d like to update.

  5. Select if the employee falls into any special categories.

    • If an employee is no longer eligible: here’s what you need to know:

      • We’ll amend your quarterly filings to remove any ERCs accrued for this employee (usually available in Gusto within ~2-4 weeks, but may be available sooner). You won't be notified when the amended return is ready, so you'll need to key an eye out for it in your admin account. To view the completed amendment in Gusto when it's available:

        •  

          Head to the Taxes & compliance section and click Tax documents.
        • Click Amended Forms.
          • Open filings from the quarters that you updated.
        • Click View to open a PDF copy.

      • If you historically were claiming credits in real-time using Gusto (no longer available), we'll debit your bank account for any credits applied in real-time to your payrolls and for any refunds we requested on your behalf from IRS. Make sure your bank account has enough funds to cover this.

      • If you received a check from the IRS, void it and send it back. If it was already cashed, pay it back to the IRS.

      • You may get penalties from the IRS for claiming credits incorrectly. If that happens, you’ll need to pay those penalties on your own.

    • If an employee becomes eligible: ERCs will be claimed for them on all eligible payrolls, past and future.

  2. Click Save.

Review or update the quarters that should accrue ERCs

If you want a quarter to accrue credits, it will have to meet the gross receipts requirement.

  1. Head to the COVID-19 section.

  2. Click the Employee retention credit tile. 

  3. Under the “Credit accrual history” headline, click Manage quarters.

  4. Click Edit next to the applicable quarter.

  5. Based on the updated answers to the questions we’ll ask, we’ll let you know the next steps.

  6. Based on the answers you provided, click the green button to proceed:

    • Save

    • Save and continue

    • Disable 

  7. Complete any remaining steps.

  8. Click Save and finish.

Review or update your per-payroll credit accrual history

  1. Head to the COVID-19 section.

  2. Click the Employee retention credit tile. 

  3. Under the “Credit accrual history” headline, click Manage quarters.

  4. Click the dropdown next to each quarter that needs to be reviewed or updated.

  5. Click Edit accruals. 

  6. Toggle the PPP selections as needed.

    • If you’re reversing ERCs that have already been claimed on previous filings:

      • We’ll amend your quarterly filings to remove any ERCs accrued for this employee (within 4 weeks). Once the amendment(s) have been filed, you can view it in the Documents section of Gusto.

      • If you historically were claiming credits in real-time using Gusto (no longer available), we'll debit your bank account for any credits applied in real-time to your payrolls and for any refunds we requested on your behalf from IRS. Make sure your bank account has enough funds to cover this.

      • If you received a check from the IRS:

        • Void it and send it back—follow the IRS instructions, specifcally under the title, "If your refund was a paper Treasury check and hasn't been cashed." The address to send the check to can be found at the bottom of the IRS article.

        • If it was already cashed, pay it back to the IRS using the EFTPS (electronic federal tax payment system).

          • If you're unable to pay within the EFTPS portal, call them directly at 1 (800) 555-4477 to repay the taxes. They'll be able to add that feature or direct you to open a new account—this will not affect Gusto’s ability to pay taxes in the future.
      • To find out what taxes are still owed to the IRS after making updates:
        • Wait for the completed amended return to show up in your Gusto account. This usually takes up to 2 weeks, but may be available sooner. You won't be notified when the amended return is ready, so you'll need to key an eye out for it in your admin account.
        • Once the amendment is complete, you can find the amended Form 941-x with the most recent filing date—for the applicable modified quarters—in Gusto. To do so:
          • Head to the Taxes & compliance section and click Tax documents.
          • Click Amended Forms.
            • Open filings from the quarters that you updated.
          • Click View to open a PDF copy.
        • Find the amount located under "tax correcton" on Line 27.
          • If the number on line 27 is negative, that's what the IRS will refund the company. If positive, that is what is owed to the IRS.
            • Informational only—line 26 displays how much credit was applied originally and the amount that should've been credited.

      • You may get penalties from the IRS for claiming credits incorrectly. If that happens, you’ll need to pay those penalties on your own.

Step five: verify eligibility and gross receipts at the end of each quarter

To claim the Employee Retention Credits that you accrued each quarter, let us know if your company met the gross receipts requirements.

  1. Head to the COVID-19 section.

  2. Click the Employee retention credit tile. 

  3. Look for the alert and click Verify eligibility—this only occurs at the end of each quarter, and because the ERCs ended in Q3 of 2021, you shouldn't expect to see this unless you opted in for Q3.  

    • You can also verify eligibility by clicking the related sticky on your main Dashboard.

  4. We’ll ask you two questions:

    • Did your company experience losses of at least 20% in the current quarter relative to the same quarter in 2019?

    • Would you like to accrue ERCs in the next quarter?

  5. Click Save and continue. 

  6. Confirm the eligible payrolls for the quarter. 

  7. Click Save and finish. 

    • If you’re eligible to claim the credits:

      • We will claim these credits for you when we file your quarterly taxes.

      • You can expect to receive a refund check from the IRS. Refund timing will vary—reach out to the IRS directly if you have questions.

      • You aren’t allowed to claim other federal tax credits at the same time as ERCs. If Gusto is handling your other credits, don’t worry about this—we’ll keep you compliant.

        • If you’re claiming (or plan to claim) Indian Employment Credits, Employer Wage Credits, or Empowerment Zone Credits, or any other credits outside of Gusto, reach out to your CPA.

    • If you’re not eligible because of wages paid using PPP funds:

      • Since your company used PPP funds on all your wages, you aren’t eligible to claim the ERCs that you’ve accrued. We won’t claim these credits on your quarterly taxes.

      • Once you have payrolls that aren’t paid with PPP funds, go to the ERC settings page to let us know.

    • If you’re not eligible because you didn’t meet the gross receipts requirement:

      • Since you didn’t meet the gross receipts requirements from the IRS, you aren’t eligible to claim the ERCs that you’ve accrued. We won’t claim these credits on your quarterly taxes.

      • If anything changes and you meet the gross receipt requirement again, go to your ERC settings page and select the quarters that should start accruing credits again.

Work with Clarus to claim tax credits

Clarus specializes in tax credits like the ERC. We’ve partnered together so you can get the help you need.

What you get

What it costs

Clarus will charge 10% of the ERC amount that they determine you’re eligible to claim. If you end up not qualifying for the credit, that fee will be waived.

Heads up!

If you choose to work with Clarus to claim credits, they’ll help you amend quarterly filings because Gusto’s filings will be incomplete since we won’t report the credits you claimed outside of Gusto.