ERC 2020 vs 2021: What Changed and Why It Matters
Understand the critical differences between 2020 and 2021 ERC rules. Credit amounts, eligibility thresholds, and qualification requirements changed significantly.
The Employee Retention Credit rules changed significantly between 2020 and 2021. These differences affect everything from how much credit you could claim to which quarters you qualified for to how the credit interacts with PPP loans. Understanding these distinctions is critical for defending your claim if the IRS questions which rules applied to your situation.
Credit Amount Differences
The most significant change between 2020 and 2021 was the credit amount itself:
- 2020 Credit Rate: 50% of qualified wages, up to $10,000 in wages PER EMPLOYEE for the entire year. Maximum credit: $5,000 per employee for all of 2020.
- 2021 Credit Rate: 70% of qualified wages, up to $10,000 in wages PER EMPLOYEE PER QUARTER. Maximum credit: $7,000 per employee per quarter, or $21,000-$28,000 per employee for 2021.
Tip: The 2021 credit was significantly more generous—both a higher percentage (70% vs 50%) and per-quarter caps instead of annual caps. This is why many businesses had much larger 2021 claims.
Gross Receipts Test Changes
The threshold for qualifying based on decline in gross receipts changed:
- 2020 Threshold: Gross receipts must be less than 50% of the same quarter in 2019. This was a steep decline—businesses had to lose more than half their revenue.
- 2021 Threshold: Gross receipts must be less than 80% of the same quarter in 2019. This 20% decline threshold made many more businesses eligible.
- Alternative comparison for 2021: For 2021, businesses could also use the immediately preceding quarter's comparison to 2019 if it was more favorable.
Warning: When defending your claim, make sure you applied the correct threshold for the year. A 30% decline qualifies you for 2021 but not 2020.
Employee Count Thresholds
The definition of large employer changed, affecting which wages qualified:
- 2020 Large Employer: More than 100 full-time employees. Large employers could only claim wages for employees NOT providing services.
- 2021 Large Employer: More than 500 full-time employees. This expanded who counted as a small employer.
- Small employer advantage: Small employers could claim wages for ALL employees during eligible quarters, whether they were working or not.
Tip: A business with 200 employees was a large employer in 2020 (limiting qualified wages) but a small employer in 2021 (expanding qualified wages). This dramatically affected claim amounts.
PPP Coordination Rules
Perhaps the most confusing change involved how ERC interacted with PPP loans:
- Original 2020 Rule: If you received a PPP loan, you could NOT claim ERC at all. These programs were mutually exclusive.
- December 2020 Change: The Consolidated Appropriations Act (CAA) changed the rules retroactively. PPP recipients COULD now claim ERC, but not on the same wages used for PPP forgiveness.
- Wage allocation requirement: You must show that wages claimed for ERC were NOT included in your PPP forgiveness application. This requires careful documentation.
- Common audit issue: The IRS frequently questions whether proper wage allocation occurred between PPP and ERC. This is a major audit focus.
Warning: If you received PPP and claimed ERC, be prepared to show exactly which wages went to each program. Double-dipping on the same wages is a top audit target.
Eligible Quarters and Timing
The quarters during which you could claim ERC differed by year:
- 2020 Eligible Quarters: Q2 2020 (March 13-June 30), Q3 2020, and Q4 2020. The credit started mid-March when COVID was declared a national emergency.
- 2021 Eligible Quarters: Q1 2021, Q2 2021, Q3 2021, and for recovery startup businesses only, Q4 2021.
- Infrastructure Act limitation: For most businesses, ERC eligibility ended after Q3 2021 due to the Infrastructure Investment and Jobs Act—except for recovery startup businesses.
- Startup special rules: Recovery startup businesses (new businesses started after February 15, 2020) had unique eligibility for Q3 and Q4 2021 even without government order impact or gross receipts decline.
Key Takeaways
- 2021 credit was 70% (vs 50%) and capped per quarter (vs per year), making it significantly more valuable
- Gross receipts threshold was 50% decline for 2020 but only 20% decline for 2021
- Large employer threshold was 100 employees in 2020 but 500 in 2021
- PPP coordination rules changed in December 2020—retroactively allowing dual claims with wage allocation
- Most businesses could only claim through Q3 2021; Q4 2021 was limited to recovery startups
Frequently Asked Questions
Why was the 2021 ERC credit larger than 2020?
Congress expanded the credit in December 2020 through the Consolidated Appropriations Act. The credit rate increased from 50% to 70%, and the cap changed from $10,000 per employee per year to $10,000 per employee per quarter, making the 2021 credit potentially 4-5 times larger.
Could I claim ERC if I had a PPP loan?
Originally no, but the rules changed in December 2020. After that change, you could claim both, but you could not use the same wages for both programs. You must show clear allocation of which wages went to PPP forgiveness vs. ERC.
What was the gross receipts threshold for ERC eligibility?
For 2020, gross receipts had to decline more than 50% compared to the same quarter in 2019. For 2021, the threshold was relaxed to a 20% decline. Additionally, 2021 allowed you to use the prior quarter's comparison if more favorable.
When did ERC eligibility end?
For most businesses, ERC eligibility ended after Q3 2021 when the Infrastructure Investment and Jobs Act was passed. Only recovery startup businesses (started after February 15, 2020, with under $1M average gross receipts) could claim for Q4 2021.
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