What Is IRS Notice 2021-20? 2020 ERC Claims and Documentation

IRS Notice 2021-20 is the Internal Revenue Service’s formal guidance on how to calculate and claim the Employee Retention Credit for wages paid in 2020. It sets the credit at 50 percent of qualified wages, capped at $10,000 in wages per employee for the year, for a maximum credit of $5,000 per employee.¹ The notice translates the CARES Act rules, as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, into the working standards the IRS uses to accept or deny claims, and it still controls the retroactive Form 941-X claims and audits moving through the system now.²

Who Qualifies for the 2020 Credit

There are two independent paths to eligibility under the notice, and you only need to satisfy one.

The first is the government order test. Your business qualifies for a quarter if a federal, state, or local COVID-19 order fully or partially suspended your operations by limiting commerce, travel, or group meetings.³ A restaurant closed to dine-in service but still running takeout is the textbook partial suspension.

Partial suspensions have to clear a numerical bar. The IRS treats an order as a real suspension only if it affected more than a nominal portion of the business, meaning at least 10 percent of gross receipts from the affected operations or at least 10 percent of total employee hours.³ Mask mandates, one-way aisles, and similar operational tweaks do not clear that threshold, and the IRS routinely denies claims that rely on them.

The second path is a purely financial test. For 2020, eligibility begins in the first calendar quarter in which your gross receipts fell below 50 percent of the same quarter in 2019. It ends after the quarter in which gross receipts recover above 80 percent of the corresponding 2019 quarter.³ Use the same accounting method you use for federal income tax.

Tax-exempt organizations under Section 501(c) qualify under the same two tests and can claim the credit for wages paid after March 12, 2020, and before January 1, 2021.⁴

Which Wages Count

Whether all wages count or only some depends on your 2019 headcount. If you averaged more than 100 full-time employees in 2019, you are a large employer and can only include wages paid to employees for time they were not providing services. If you averaged 100 or fewer, every wage paid during an eligible quarter counts, whether the employee was working or not.¹ A full-time employee for this purpose is one who averaged at least 30 hours per week or 130 hours per month in 2019.

Aggregation is where this test quietly bites. Related businesses under common ownership have to be counted as a single employer. If you own more than 50 percent of two companies and their combined workforce tops 100, both companies are large employers for ERC purposes, even if each one on its own has fewer.⁵ Parent-subsidiary groups, brother-sister groups, and affiliated service groups all fall under the rule. Missing this is one of the most common reasons claims collapse on audit.

Qualified health plan expenses count as wages under the notice, including for furloughed workers who received no other taxable pay during the period.² That lets employers recover some of the cost of keeping coverage in force for people who were not actively working.

One exclusion trips up closely held businesses. Wages paid to a majority owner’s relatives do not count. The excluded relationships include children, parents, siblings, in-laws, aunts, uncles, nieces, nephews, and anyone sharing the owner’s household.³ Constructive ownership rules apply too, so you can be treated as a majority owner without holding shares directly.

How the Credit Is Calculated

Take qualified wages (including health plan expenses) for each eligible quarter in 2020, then apply 50 percent. The $10,000 wage cap runs across the entire year per employee, not per quarter, so once an employee’s counted wages hit $10,000, no further wages for that person add to the credit. The maximum credit per employee for 2020 is $5,000.¹

Coordination With PPP and Other Credits

The same wages cannot generate both PPP loan forgiveness and the ERC. Any wages you reported as payroll costs on a PPP Loan Forgiveness Application are automatically excluded from the credit.² The rule works by deemed election: including a wage on the forgiveness application is treated as electing not to claim the credit on it.

That leaves room for many businesses to still claim something. If you loaded more payroll onto your PPP application than you actually needed for full forgiveness, the excess can qualify for the ERC. A borrower with $100,000 in payroll who needed only $60,000 for forgiveness still has $40,000 potentially eligible. The original CARES Act barred PPP borrowers entirely, but the 2020 Relief Act removed that bar retroactively, which is why late Form 941-X claims are still worth running for businesses that skipped the credit initially.

Wages used for the ERC also cannot be used for the Work Opportunity Tax Credit or the Research Credit. No double dipping between wage-based credits.

Reducing Your Wage Deduction

Claiming the credit is not free money on top of your deductions. You have to reduce your wage deduction on your income tax return by the amount of the credit, for the year the qualified wages were paid.³ A $50,000 credit means $50,000 less in deductible wages.

Retroactive claims complicate this. If you receive the credit in a later year and never reduced the deduction on the original return, you have two options: amend the prior-year income tax return to cut the deduction, or report the overstated wage expense as gross income on the return for the year you received the credit.³ If the IRS later disallows the claim, you can restore the wage deduction on the return for the year the disallowance becomes final.

How to File a Retroactive 2020 Claim

The credit is claimed on a federal employment tax return. For 2020 quarters, that means Form 941-X, the Adjusted Employer’s Quarterly Federal Tax Return, filed separately for each qualifying quarter.⁴ You’ll need:

Payroll records showing wages and payment dates by employee
Copies of any government orders that restricted operations
Gross receipts records for 2019 and 2020 to document either eligibility path
Your PPP Loan Forgiveness Application, if you had one, to identify wages already used

Form 941-X is generally mailed rather than filed electronically, and it goes to the IRS service center for your location. The April 2023 revision of the form instructions walks through the ERC-specific line entries.

If You Filed a Claim You Now Doubt

The claim withdrawal process is still open. You can use it if your Form 941-X was filed solely to claim the ERC, you made no other adjustments on it, you want to withdraw the entire claim, and the IRS has not yet paid the refund (or you have not cashed the check).⁶ A withdrawn claim is treated as never filed, with no penalties or interest. If you already received and deposited the refund and cannot use the withdrawal process, the remaining route is an amended return repaying the full amount; the second ERC Voluntary Disclosure Program that let taxpayers repay only 85 percent closed on November 22, 2024, and no replacement has been announced.⁷

Documentation and the Six-Year Audit Window

The One Big Beautiful Bill Act, signed July 4, 2025, extended the statute of limitations for IRS audits of ERC claims to six years for all applicable quarters.⁸ The window runs from the later of the date the original return was filed or the date the ERC refund claim was submitted. A 2020 claim filed on Form 941-X in 2021 now sits open for assessment until 2027; later-filed claims stay open longer.

Keep every supporting document for at least six years from the date you filed the claim. That means payroll records, government orders, gross receipts calculations, PPP forgiveness materials, and the worksheets you used to arrive at qualified wages. The four-year retention that was routine under the old rules is no longer enough.

Penalties for a False Claim

The IRS has opened more than 545 criminal investigations tied to suspected ERC fraud. A false claim is not treated as a paperwork issue. Under the tax evasion statute, individuals face fines up to $250,000 and up to five years in prison per count, and because Form 941-X is mailed, prosecutors often add wire fraud charges carrying up to 20 years per count.⁹ Courts must also order full restitution of the fraudulent credit, and that restitution is not dischargeable in bankruptcy. Enforcement reaches promoters as well as the businesses that filed. If a third-party firm prepared a claim you’re now uneasy about, correcting it before the IRS makes contact leaves you with meaningfully better options than waiting.

1
Internal Revenue Service. Employee Retention Credit – 2020 vs 2021 Comparison Chart
2
Internal Revenue Service. IRS Notice 2021-20 – Guidance on the Employee Retention Credit under Section 2301 of the Coronavirus Aid, Relief, and Economic Security Act
3
Internal Revenue Service. Frequently Asked Questions About the Employee Retention Credit
4
Internal Revenue Service. Employee Retention Credit
5
Internal Revenue Service. Application of the Controlled Group Rules under Section 52 to Tax-Exempt Organizations in Determining Eligibility for and the Amount of the Employee Retention Credit (CCA 202430007)
6
Internal Revenue Service. Withdraw an Employee Retention Credit (ERC) Claim
7
Internal Revenue Service. Employee Retention Credit – Voluntary Disclosure Program
8
Internal Revenue Service. IRS Frequently Asked Questions (FAQs) Address Employee Retention Credits Under ERC Compliance Provisions of the One, Big, Beautiful Bill
9
Internal Revenue Service. Tax Crimes Handbook